The Efficient Market Hypothesis, Fact Or Fiction? Part 4

Today concludes our four-part series on the efficient market hypothesis. While the EMH helps us understand how markets work, in terms of investment strategy it really doesn’t matter whether markets are efficient or not. The only thing that really matters is whether you can exploit inefficiencies persistently, after the expenses of the effort. That has proven to be extremely difficult – so difficult in fact that even the behavioralists, who poke holes in the EMH by identifying persistent mistakes that investors make, recommend acting as if the market were efficient.

Richard Thaler, one of the “fathers” of behavioral finance, in an interview with The Wall Street Journal in which he was discussing market inefficiencies, conceded that most of his retirement assets are held in index funds, the very industry that Fama’s research helped to launch. And despite his research on market inefficiencies, he also conceded that “it is not easy to beat the market, and most people don’t.”1

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