THE EFFICIENT MARKET HYPOTHESIS: Not So Efficient After All?

Recent events in financial markets around the world have made the question of whether it is possible for an individual investor to outperform the market as a whole extremely timely. In the short-term, luck, timing, and possibly insider information can make it possible to outperform the market. But in the long-term, the efficient market hypothesis holds that the market renders anything but normal profits impossible. This research evaluates the efficient market hypothesis and whether it is possible for an individual investor to outperform the market in the long-term.

The efficient market hypothesis holds that capital markets are efficient in that they do not enable above-average reward without above-average risk. This "efficiency" comes about from the idea that all known information about a company at any point in time is reflected in the price of that security at the same point in time. Unknown information will have an unknown effect on the price, but when the unknown becomes known, the market will rapidly reflect that information in the price (Malkiel, 2003).

In order for an investor to outperform the market, it is necessary to be able to predict the behavior of the market over the long-term. Short-term predictions, whether based on luck, insider information, or manipulation through online blogs and similar outlets, can yield short-term gains that outperform the market over the cours

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e market has already adapted to the new data. Strong form efficiency holds that all information-including that not available publicly-is reflected in the stock price. Strong form efficiency is based in part on insider trading in which individuals who have privileged information act-or encourage others to act-on that information and thus move the stock price accordingly ("Market Efficiency," n.d.). Analysis of Hypothesis If the efficient market hypothesis is an accurate predictor of how investors actually perform in the market, then investors cannot outperform the market in the long run. This is not to say, however, that investors cannot realize a profit over the long term nor that they can blindly select their stocks. Although much as been made of the "blindfolded" monkey throwing darts at the financial pages of the Wall Street Journal to pick stocks, some thought must still go into selecting a portfolio that is diversified enough to reflect the broad market and thus behave as the entire market behaves. This is necessary because it is impossible for a single investor to invest in all stocks in the market and the way that indices such as the Dow Jones average are calculated mean that creating a portfolio of

Category: Economics - T