How does efficient market theory work? And does "efficient" mean "correct"?
Answers
102 points
qrman answered 11 months ago …
Efficient market theory assumes that all information about an asset is known by the entire world, which is 100% rational. Therefore, the current market price of an asset accurately reflects the true value of the asset. If this theory was "correct", then there would be no bubbles and prices would only move as new information became available to the market.
While perhaps a useful academic framework, this theory tends to fall apart in reality as there are bubbles and prices can move wildly on no new news.
356 points
Dusty answered 11 months ago …
The Theory was invented by one of those Market Geniuses who made incredible amounts of money. It worked very well when he first published it. Times and conditions and laws and everything change. Yes, there is a lot of validity in the Theory but in spite of knowledge, the human investor is not rational and therefore the Market is not rational or efficient. Computer-run trading is now common with systems that are probably better than the "Super Computers" of not very long ago. Computers are not emotional and come a lot closer to "Efficient" than humans ever can. However, the computers can still only do what is programmed into them--- by humans. If in doubt, go watch the movie "War Games" (again?).
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3678 points
MNSL answered 11 months ago …
Efficient market theory cannot apply in the current market including commodity market. If you can do, some research on that you will understand how it works.
I think one should learn lot of things in the market if they want to become successful.
Market is not always efficient.
In the current commodity, market swap dealers are equally long and short in the market for some commodities.
108 points
andbham answered 11 months ago …
If the market were truly efficient, it would be very hard to make money investing, but it would also be hard to loose money. Knowledge is power. Since the real world market is not efficient, since complete knowledge is not possible, we are left to do the best we can. Besides, how else could insider trading work!!!
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289 points
CG answered 11 months ago …
Efficient market theory doesn't work at all.
It's a cop-out for those who won't take responsiblity for their money.
