Lately, especially in the past six months, the Efficient Market Hypothesis, upon which the Dumb Agent Theory is predicated, has taken a beating from many sides. How can an efficient market have bubbles like the ones we saw in 2000 and, more recently, the Housing Bubble? How can anyone say with a straight face that investors will always act in a rational manner?
Then again, if the rational thing is to say that markets are always efficient, how can it be rational to continue investing in the market trying to beat it? And how can it be rational to pay fund managers for doing so? Isn’t this an unsustainable way of thinking?
As a reminder that the Efficient Market Hypothesis still has life in it, Buttonwood writes about how all these facts relate to each other and gives an up to date viewpoint on the EMH.
