Myth-Busting and the Efficient Market Thesis

The book deconstructs the efficient market theory, something that many us already know is a fallacy (otherwise why would all these edges we see appear over and over again?).

Here is the product description from Amazon and it does a good job of summarizing the theme of the book:

"The efficient market hypothesis—long part of academic folklore, but codified in the 1960s at the University of Chicago—has evolved into a powerful myth. It has been the maker and loser of fortunes, the driver of trillions of dollars, the inspiration for index funds and vast new derivatives markets, and the guidepost for thousands of careers. The theory holds that the market is always right, and that the decisions of millions of rational investors, all acting on information to outsmart one another, always provide the best judge of a stock's value. That myth is crumbling.

Celebrated journalist and columnist Fox introduces a new wave of economists and scholars who no longer teach that investors are rational or that the markets are always right. Many of them now agree with Yale professor Robert Shiller that the efficient markets theory 'represents one of the most remarkable errors in the history of economic thought.' Today the theory has given way to counterintuitive hypotheses about human behavior, psychological models of decision making, and the irrationality of the markets. Investors overreact, under react, and make irrational decisions based on imperfect data. In his landmark treatment of the history of the world's markets, Fox uncovers the new ideas that may come to drive the market in the century ahead."

My copy of the book just arrived and I started reading it last night. It’s excellent and this book will likely be discussed for many years to come. Most importantly for us as traders, it provides further proof that markets really are not efficient and that with the proper strategies and tools, you can profit from these inefficiencies, especially on a shorter-term basis.

After you read the book, send me know your thoughts on it and tell me what you learned. I’ll share everyone’s thoughts and ideas in a future Trading Lesson of the Day.

This is from Larry Connors Daily Battle Plan which he publishes each morning. If you’d like to take a free trial click here, or call 1-888-484-8220 ext 1 to start your free trial today.