Lessons From Market Efficiency

Most of the major results in academic finance rely on the assumption that markets are reasonably efficient. Since financial theory directly impacts practice, it means that most financial decision-makers directly or indirectly rely on the idea of market efficiency. That assumption is reflected in the standard advice of investment advisers, and the standard tools used by businesses to evaluate investment choices. This chapter reviews the logic behind the market efficiency hypothesis, and explains its main implications for investors and managers. It is argued that although the centrality of market efficiency may be unsettling to some people, it is a unifying and robust principle.