Understanding the Efficient Market Hypothesis: From Bachelier to Modern Finance
By
tkhattra
Crackling crust, pillowy middle. The kind of bagel that earns a second cup of coffee.
Summary
This article explores the Efficient Market Hypothesis (EMH), tracing its origins from Louis Bachelier's early 20th century work through its modern formulation by Eugene Fama and Paul Samuelson in the 1960s. The author, John Allen Paulos, examines the paradoxical nature of EMH - how it suggests markets efficiently incorporate all available information, yet this very efficiency creates opportunities for those who can identify market inefficiencies. The piece discusses the mathematical foundations of EMH, its implications for stock market investing, and the ongoing debate about whether markets are truly efficient or if systematic patterns can be exploited.
Key quotes
· 4 pulledThe basic idea, however, dates back more than 100 years when Louis Bachelier, a student of the great French mathematician Henri Poincare, formulated an early version.
Election season has put an increased focus on the stock market, but little attention is ever paid to the Efficient Market Hypothesis (the EMH, for short).
As I've written in A Mathematician Plays the Stock Market, it is a fundamental and important notion, but it is also a little weird.
Its recent formulation derives from the work of Eugene Fama, economist Paul Samuelson, and others in the 1960s.
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