The Myth That Markets Get Prices Right Won’t Die

At this point, the efficient markets hypothesis makes for an easy rhetorical target. Precious few economists and financial professionals are willing to stand up in public anymore and assert that financial markets produce the best estimate of fundamental asset values. A series of enormous bubbles, plus decades of outsized profits for hedge funds like Renaissance Technologies, has turned the EMH into a bit of a joke.

Meanwhile, finding ways to beat the market has become a parlor game in the world of financial economics. Hundreds of papers have been published claiming to have found new ways to predict returns. Defenders of the EMH counter that many of these so-called “anomalies” are probably false alarms, much of it due to what's known as publication bias. As economists Campbell Harvey, Yan Liu and Caroline Zhu pointed out in a famous 2013 paper, the statistical hurdles that researchers demand that anomalies pass are probably not high enough. That leads to a sort of “monkeys on typewriters” effect -- if enough finance professors sift through the data for long enough, they’ll find a bunch of apparent EMH violations that are exciting enough to get published, but which evaporate upon further scrutiny. That concern seems to be supported by the fact that most anomalies disappear over time.