Efficient Market Theory: A Contradiction Of Terms

Efficient Market Theory: A Contradiction of Terms

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Abstract

According to the Efficient Market Theory, it should be extremely difficult for an investor to develop a "system" that consistently selects stocks that exhibit higher than normal returns over a period of time. It should also not be possible for a company to "cook the books" to misrepresent the value of stocks and bonds. An analysis of current literature, however, indicates that companies can and do "beat the system" and manipulate information to make stocks appear to perform above average. An understanding of the underlying inefficient "human" factors in the market equation is necessary in order to account for the flaw in Efficient Market Theory.

Efficient Market Theory: A Contradiction of Terms

Efficient Market Theory (EMT) is based on the premise that, given the efficiency of information technology and market dynamics, the value of the normal investment stock at any given time accurately reflects the real value of that stock. The price for a stock reflects its actual underlying value, financial managers cannot time stock and bond sales to take advantage of "insider" information, sales of stocks and bonds will not depress prices, and companies cannot "cook the books" to artificially manipulate stock and bond prices. However, information technology and market dynamics are based upon the workings of ordinary people and diverse organizations, neither of which are arguably efficient nor consistent. Therefor...

Efficient Market Theory: A Contradiction Of Terms

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