Efficient Markets Hypothesis

THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS, L. Blume, S. Durlauf, eds., 2nd Edition, Palgrave Macmillan Ltd., 2007

28 Pages Posted: 6 Jun 2007

See all articles by Andrew W. Lo

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering; Santa Fe Institute

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 Classification: G10, G12, G14

Suggested Citation

Lo, Andrew W., Efficient Markets Hypothesis. THE NEW PALGRAVE: A DICTIONARY OF ECONOMICS, L. Blume, S. Durlauf, eds., 2nd Edition, Palgrave Macmillan Ltd., 2007, Available at SSRN: https://ssrn.com/abstract=991509

Andrew W. Lo (Contact Author)

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

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Santa Fe Institute

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