Efficient Market Hypothesis

What is the efficient market hypothesis?

The main idea behind the efficient market hypothesis is that the prices of traded assets already reflect all publicly available information – making it impossible to “beat the market.”

Why is that the case? Well, on average, buyers and sellers of traded assets, such as stocks, all have the same information.

Old information is already incorporated into the prices. But new information is, by definition, unexpected or random. This makes it difficult to forecast stock returns: a stock is just as likely to overperform the market as it is to underperform. With today’s technology, information travels fast and can affect the market faster than the blink of an eye. This makes the the efficient market hypothesis all the more efficient!

Want to dive deeper into these topics? Check out our Money Skills series on investing like an economist. Or take a cruise through the framework of the U.S. financial system in our Macroeconomics section on Savings, Investment, and the Financial System.