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Printefficient markets hypothesis
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by
Steven
N.
Durlauf
and
Lawrence
E.
Blume
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Abstract
The efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information. Developed independently by Paul A. Samuelson and Eugene F. Fama in the 1960s, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process. The most enduring critique comes from psychologists and behavioural economists who argue that the EMH is based on counterfactual assumptions regarding human behaviour, that is, rationality. Recent advances in evolutionary psychology and the cognitive neurosciences may be able to reconcile the EMH with behavioural anomalies.
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Keywords
adaptive markets hypothesis; agent-based models; altruism; Arbitrage; asset price anomalies; behavioural biases; behavioural economics; behavioural finance; bid–ask bounce; biology and economics; bounded rationality; capital asset pricing model; consumer choice; creative destruction; deductive inference; dividend smoothing; dividend-discount model; Dutch books; economic complexity; efficient markets hypothesis; emotions; equilibrium; equity risk premium; evolutionary economics; evolutionary game theory; evolutionary psychology; Fama, E. F.; financial economics; herding; hyperbolic discounting; inductive inference; information aggregation; informational efficiency; January effect; joint hypotheses; learning; long-term memory; loss aversion; market efficiency; martingales; miscalibration of probabilities; natural selection; neuroeconomics; noise traders; optimization; overconfidence; overreaction; post-earnings announcement drift; preferences; present value; price reversals; psychological accounting; punctuated equilibrium; random walk hypothesis; rational expectations; regret; relative efficiency; risk aversion; risk preferences; risk–reward relation; Samuelson, P. A.; satisficing; serial correlation; Simon, H.; size effect; social norms; sociobiology; statistical inference; stock price volatility; survival of the fittest; uncertainty; utility maximization; variance bounds; variance decompositionBack to top
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See Also
I thank John Cox, Gene Fama, Bob Merton, and Paul Samuelson for helpful discussions.
How to cite this article
Lo, Andrew W. "efficient markets hypothesis." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 02 September 2010 <http://www.dictionaryofeconomics.com/article?id=pde2008_E000050> doi:10.1057/9780230226203.0454
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