Economist Eugene Fama: 'Efficient markets is a hypothesis. It's not reality
Economists and technologists revisit the efficient market hypothesis after Eugene Fama reiterates that it is an idealized model, not a description of reality. Commenters explore what “efficiency” really means in financial markets, how information, psychology, fraud, regulation and externalities (like pollution or labor abuses) distort prices, and why markets can be both hard to beat and still systematically flawed. Many see EMH as a useful baseline for thinking about asset pricing, but criticize how it is stretched into ideology to justify policy or to claim markets always allocate resources well.
Scope and Meaning of the Efficient Market Hypothesis (EMH)
- Several comments stress EMH is narrowly about financial asset pricing, not “markets” or “society” in general.
- EMH is framed as a model/hypothesis: prices rapidly incorporate available information, not that markets are perfectly efficient or “right.”
- Some note the original proponent has always treated it as a model that’s never 100% true.
Information, Prices, and Quality
- Markets are described as information-compression systems: huge complexity → single price.
- Critics say prices are one-way encodings; you can’t decode quality, labor conditions, or externalities from price alone.
- This creates “lemon market” dynamics and pushes quality down when buyers can’t assess it.
- Online reviews and ratings are seen as a crude, easily gamed substitute for objective quality signals; detailed proposals for audit-based rating systems are discussed.
Externalities, Ethics, and Inequality
- One side argues pollution, forced labor, and low quality are “priced in” via consumers’ (often low) willingness to care.
- Others counter that harms fall on people who don’t participate in the relevant transactions and can’t “opt out,” so they’re not truly priced in.
- Ethical options often appear only as high-end niche products; information opacity and lack of regulation mean consumers rarely even get a realistic ethical choice.
Entrepreneurship, Innovation, and EMH
- Several argue perfectly efficient markets would leave no room for entrepreneurs or active investors; EMH would make funding innovation irrational.
- Others reply EMH applies mainly to public markets; private startups and changing conditions still create opportunities and uncertainty.
How Efficient, and For Whom?
- Consensus: markets are not perfectly efficient but not trivially beatable either.
- Some see “markets trend toward efficiency”; critics note there’s no bound on how long that takes and “in the long run” may be irrelevant.
- Distinction is drawn between markets being hard to beat and inefficiencies being structurally unexploitable or dominated by noise.
Economics, Ideology, and Models
- Multiple comments accuse EMH and related ideas of being treated as ideological dogma or political cover, especially in macro policy.
- Others defend economics as increasingly empirical, emphasizing that models are abstractions, not literal reality.