Amy Anyone: What is EMH?

Boris The Banker: That’s the Efficient Market Hypothesis, or sometimes the Efficient Markets Hypothesis.

Amy: What’s that?

Boris: It says that all available and relevant information has been taken into account in the price of items in the market — a stock market for example.

Amy: Does it have any implications?

Boris: Yes.  If the hypothesis is true, then it is impossible to usefully predict price changes.

Amy: Is the hypothesis true?

Boris: No.  (silently to self: Otherwise my job is pointless.)  Sometimes prices are too high and sometimes prices are too low.

Amy: Hmm.  Is the market efficient for expensive bankers like you?

Boris: Yes.  Obviously banks wouldn’t pay more than was reasonable for people like me.

Amy: Oh?

Subscribe to the Portfolio Probe blog by Email