Efficient-Market Hypothesis

ScholarlyTechnicaleconomicssystems

Etymology

Formalized by economist Eugene Fama in the 1960s and 70s, drawing on earlier work by Louis Bachelier (1900) and Paul Samuelson. “Efficient” here means informationally efficient — prices absorb news fast — from Latin “efficere,” to accomplish. Fama shared a Nobel for the work.

  1. noun phrase · /ih-FISH-unt MAR-kit hy-POTH-uh-sis/

    The theory that asset prices already reflect all available information, so it is nearly impossible to consistently beat the market.

    What it names

    A tool for humility about stock-picking — if prices already bake in what is knowable, then reliable outperformance is luck, not skill, and “the market has priced that in” becomes a default assumption.

    Example

    She invests in index funds because the efficient-market hypothesis convinced her that beating the pros is a fool’s errand.

    Related idea

    It rests on arbitrage: the reason prices stay “correct” is that traders instantly exploit and thereby erase any mispricing they can find.

See also

ArbitrageBounded RationalityInformation asymmetryReflexivity