The Efficient Markets Hypothesis (EMH) says that markets are efficient at processing information about what prices should be in a market.
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First, the efficient market hypothesis assumes that all investors perceive all available information in precisely the same manner.
As Mauboussin points out, the Paradox of Skill is a concrete way to describe the efficient market hypothesis.
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And yet I am not so won over by Bogle's thinking that I subscribe to the efficient market hypothesis.
Indeed, there are theories out there like the efficient markets hypothesis which say that we cannot in fact predict them.
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None of these objections challenges the use of the efficient markets hypothesis.
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The efficient market hypothesis (EMH) maintains that all stocks are perfectly priced according to their inherent investment properties, the knowledge of which all market participants possess equally.
With the recent explosion in behavioral finance and the shattering of our absolute trust of the efficient market hypothesis, Shiller explains Dodd-Frank and regulators in general is still lacking in recognizing our new understanding of the financial landscape.
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Secondly, under the efficient market hypothesis, no single investor is ever able to attain greater profitability than another with the same amount of invested funds: their equal possession of information means they can only achieve identical returns.
Thirdly (and closely related to the second point), under the efficient market hypothesis, no investor should ever be able to beat the market, or the average annual returns that all investors and funds are able to achieve using their best efforts.
Both Mr Merton and Mr Scholes adhered to the efficient-market hypothesis that the prices of financial assets always affect all available information.
Studying these will test the hypothesis that modern shells are more efficient than ancient ones, and thus out-competed them.
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