Efficient Market Hypothesis
...rket. However, in the real world, that is not the case. Economist Eugene Fama was an essential founder of the Efficient Market Hypothesis which, for years, was the accepted way of thinking regarding the financial markets. Fama recently published a paper that contracted his past beliefs regarding the financial markets. The paper recognizes that the market, in theory, is influence by irrational investors which creates the noise in the market. (Hilsenrath, 2004) This was shocking to many because the father of Efficient Market Hypothesis was now beginning to shift his beliefs. Supporting Fama’s new research, Richard Thaler studied the financial markets and realized that the Efficient Market Hypothesis was incorrect. The Efficient Market Hypothesis is nothing but an utopian view of the financial markets. Perceiving the market as efficient is plausible if used as starting point for decision making. Investors must understand that not all market makers are educated in the field, or make decisions rationally. It is these irrational investors who create the noise in the market. Thaler refers to the Swedish efforts to privatize their social security, where the investors had too many options, which handicapped their ability to make rational decisions. (Hilsenrath, 2004) Economist Michael Jenson (Harvard) commented on the internet stock craze and crash in the 90’s, sta...