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Efficient Markets Hypothesis
Andrew W. Lo MIT Sloan School of Management; National Bureau of Economic Research (NBER) THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS, L. Blume, S. Durlauf, eds., 2nd Edition, Palgrave Macmillan Ltd., 2007 Abstract: The efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information. Developed independently by Paul A. Samuelson and Eugene F. Fama in the 1960s, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process. The most enduring critique comes from psychologists and behavioural economists who argue that the EMH is based on counterfactual assumptions regarding human behaviour, that is, rationality. Recent advances in evolutionary psychology and the cognitive neurosciences may be able to reconcile the EMH with behavioural anomalies.
Keywords: Market Efficiency, Behavioral Finance JEL Classifications: G10, G12, G14 Accepted Paper SeriesDate posted: June 06, 2007 ; Last revised: June 06, 2007Suggested CitationContact Information
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