Noah Smith, Columnist

The Market Outsmarts Everyone

The theory that no one can consistently beat the financial markets has all sorts of problems, though it's better than any other theory of how markets behave.

October 10, 2014 at 1:03 PM UTC

By Noah Smith

Noah Smith is a former Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.

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Stated simply, the Efficient Markets Hypothesis, or EMH, is this: Anything you know, the market already knows. So the EMH says that you can't make money in financial markets by trading based on information. If you discover that a company is going to make more profit, you can't make money by buying its stock. If you find some pattern in past stock prices, it will disappear before you can make money exploiting it. This might sound like an odd definition of "efficiency," but what it means is that financial markets are very good at assimilating information.

It has become very fashionable to ridicule and dismiss the EMH. This is understandable, given the financial crisis we just went through, and the series of bubbles and mini-crises we experienced before that. John Quiggin, an economist whom I highly respect, has called it a "zombie" idea. Just recently, blogger Dan Davies called for the theory to be expunged from the economics curriculum: