Efficient Market Hypothesis

The poor efficient markets hypothesis is taking a lot of flak these days. The EMH asserts that markets reflect all publicly available information. That's interpreted by some to mean that the market price is, in some sense, the right price for traded assets and, further still, that markets are rational. These days, that's looking pretty suspect, when the markets go and do something loopy like the dot-com boom, or as stark raving batshit as they've been the past couple of years.

In defense of the EMH, it's absolutely true, as long as your willing to define information to include false information, uncertain information, kooky beliefs, and outright bullshit (deliberate attempts to deceive) modulated through widely varying abilities to understand the information and act accordingly. Layer onto that the effects of the more sophisticated players trying to guess what effect the available information will have on the ill-informed and labile masses. Now you have the kind of recursive cluster-fuck that might very well produce the kind of irrational craziness that had 7-11 employees buying beachfront condos and venerable insurance companies torching themselves. The wonder is that markets are as stable as they are. "Markets can remain irrational longer than you can remain solvent."