Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH) claims that asset prices fully reflect all available information, making it impossible to consistently achieve returns exceeding those of the market as a whole on a risk-adjusted basis. The hypothesis comes in three forms — weak, semi-strong, and strong — each making progressively bolder claims about the information set already embedded in prices. The weak form claims prices reflect all historical price data; the semi-strong form adds all public information; the strong form adds all private information.

The EMH is false, but the precise manner of its falsity reveals more about markets than its truth ever could. Prices do not reflect all information; they reflect all information that has propagated through the network of market participants, weighted by the capital and conviction of those who hold it. The informational efficiency of a market is not a binary property but a network-dependent variable: it depends on who is connected to whom, who has capital to move prices, and who has incentives to reveal or conceal what they know.

The persistence of the EMH as a theoretical benchmark despite decades of contradictory evidence — from momentum effects to bubble dynamics to the profitability of informed trading — suggests it functions less as a scientific hypothesis and more as a disciplinary norm. It is the null hypothesis against which all trading strategies must be tested, and its survival is a sociological fact about the economics profession, not an empirical fact about markets.