Efficient market hypothesis

The efficient market hypothesis is an economic theory for financial markets. For example markets that trade in stocks, bonds or property.

This theory was first developed as a Ph.D. thesis by Eugene Fama at the University of Chicago. It was widely accepted even though it was consistently shown to have empirical problems up until the 1990's when it's flaws could no longer be ignored using excuses arguments such as cognitive biases.

But even though there is a preponderance of empirical evidence to show that efficient market hypothesis is flawed there is also theoretical work that shows the hypothesis is garbage of the first order. This work was done in the 1980s by Profs. Andrew Lo and Craig MacKinlay. Their argument is that the random walk which is one of the foundations of the hypothesis never existed. Of course it took over two years for this work to ever see the light of day in a publication.

One of the upsides of the financial crisis which started in 2007 is it has cause a great number of economists and economic journalists to question and denounce the efficient market hypothesis. However the rumors of its demise may be all too soon. Never underestimate the ability of a herd of economists to cling to a useless theory. And never underestimate the underhandedness of a politician with a special interest to whip out a discredited theory to support policy that only favors that special interest.