What Is the Efficient-Market Hypothesis? Overview & Criticisms
Index funds leverage the efficient market hypothesis.
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One of the most controversial topics in finance is the efficient-market hypothesis, introduced by economist Eugene Fama in a study as part of his 1965 doctoral dissertation. The theory—formalized in a 1970 paper—holds that the financial markets are efficient, meaning no investor can gain an edge by acting on publicly available information.
Fama’s 1965 article in the Journal of Business, “The Behavior of Stock-Market Prices,” doesn’t use the term efficient-market hypothesis. Rather, it says that “a situation where successive price changes are independent is consistent with the existence of an ‘efficient’ market for securities, that is, a…
