The Efficient Market Hypothesis
The theory proposes that asset prices incorporate available information to varying degrees.
The Mechanism: The efficient market hypothesis proposes that asset prices reflect available information, with different forms of the hypothesis specifying which information is incorporated. It does not claim that prices are always correct or that markets never experience bubbles.
The Philosophical Pivot: When many investors act on public information, their trades can quickly change prices. Yet information can be incomplete, interpreted differently, or distorted by incentives and constraints.
The Horizon: The hypothesis influences investment theory and policy, but economists debate how efficiency should be measured and what kinds of market anomalies matter. Its strongest form is not universally accepted.
A market can process information rapidly and still produce a price that later looks mistaken. Efficiency describes a process under assumptions, not perfect knowledge of future value.
Belief in efficiency can itself shape behavior, including the willingness to research, regulate, or challenge a prevailing price.
The theory asks us to distinguish what a price knows from what we wish it could know.
A price can incorporate information without becoming a perfect description of reality.
If everyone trusts the price to reveal the truth, who remains responsible for investigating what the price cannot see?