The Efficient Market Hypothesis and Its Critics
Read the paperopens www.aeaweb.org in a new tab
What they found
Malkiel, author of A Random Walk Down Wall Street, walks through the challenges that behavioral finance and anomaly research raised against market efficiency in the 1990s and early 2000s: momentum, mean reversion, the dot-com bubble, calendar effects, value and size premia. For each he asks whether the pattern survives transaction costs and persists after publication. His conclusion is that markets are not perfectly efficient but are efficient enough that most investors cannot profit from the imperfections, and that the failure of professional managers to beat index funds is the best evidence.
What you can use
- A readable one-stop tour of the anomalies you will hear about, written by a skeptic.
- Many anomalies shrink or vanish after publication and after realistic costs; the January and small-firm effects are examples.
- The performance of professional fund managers is the acid test: if the pros cannot beat the index, be careful assuming you can.
- Bubbles can exist and still be nearly impossible to trade profitably in real time.
Caveats
An opinionated essay rather than a new empirical study, and written before the 2008 crisis and the replication debates of the 2010s. Its treatment of momentum is brief and now looks too dismissive.
Tags: efficiency, survey, beginner-friendly
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.