Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception: Economics Assignment, UCD, Ireland

The Efficient Market Hypothesis and Its Critics
Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behavioral elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable.

This survey examines the attacks on the efficient-market hypothesis and the relationship between predictability and efficiency. conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe.

A generation ago, the efficient market hypothesis was widely accepted by
academic financial economists; for example, see Eugene Fama’s (1970) influential survey article, “Efficient Capital Markets.”

It was generally believed that securities markets were extremely efficient in reflecting information about individual stocks and about the stock market as a whole. The accepted view was that when information arises, the news spreads very quickly and is incorporated into the prices of securities without delay.

Thus, neither technical analysis, which is the study of past stock prices in an
attempt to predict future prices, nor even fundamental analysis, which is the analysis of financial information such as company earnings, asset values, etc., to help investors select “undervalued” stocks, would enable an investor to achieve returns greater than those that could be obtained by holding a randomly selected portfolio of individual stocks with comparable risk.

The efficient market hypothesis is associated with the idea of a “random walk,” which is a term loosely used in the finance literature to characterize a price series where all subsequent price changes represent random departures from previous prices.

The logic of the random walk idea is that if the flow of information is unimpeded and information is immediately reflected in stock prices, then tomorrow’s price change will reflect only tomorrow’s news and will be independent of the price changes today.

But the news is by definition unpredictable and, thus, resulting from price changes must be unpredictable and random. As a result, prices fully reflect all known information, and even uninformed investors buying a diversified portfolio at the tableau of prices given by the market will obtain a rate of return as generous as that achieved by the experts.