Whether Markets are More Efficient or Less Efficient, Costs Matter

More than a century has passed since Louis Bachelier, in his Ph.D. thesis at the Sorbonne in 1900, wrote: “Past, present, and even discounted future events are (all) reflected in market price.” Nearly half a century later, when Nobel Laureate Paul Samuelson discovered the long-forgotten thesis, he confessed that he “oscillated . . . between regarding it as trivially obvious (and almost trivially vacuous), and regarding it as remarkably sweeping.”

Bachelier, of course, was right. By 1965, University of Chicago Professor Eugene F. Fama had performed enough analysis of the ever-increasing volume of stock price data to validate this “random walk” hypothesis, rechristened as the efficient market hypothesis (EMH). Today, the intellectual arguments against the EMH religion are few. The church, however, has three different dogmas. Princeton Professor Burton Malkiel describes them: the weak form (stock price changes over time are statistically independent); the semi-strong form (prices quickly reflect new value-changing information); and the strong form (professional managers are unable to accurately forecast the future prices of individual stocks).

via .  http://www.vanguard.com/bogle_site/sp2004AIMRefficientMrkts.html


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s