Customer Quote by Alan S. Blinder

““The adjective “efficient” in “efficient markets” refers to how investors use information. In an efficient market, every titbit of new information is processed correctly and immediately by investors. As a result, market prices react instantly and appropriately to any relevant news about the asset in question, whether it is a share of stock, a corporate bond, a derivative, or some other vehicle. As the saying goes, there are no $100 bills left on the proverbial sidewalk for latecomers to pick up, because asset prices move up or down immediately. To profit from news, you must be jackrabbit fast; otherwise, you’ll be too late. This is one rationale for the oft-cited aphorism “You can’t beat the market.” An even stronger form of efficiency holds that market prices do not react to irrelevant news. If this were so, prices would ignore will-o’-the-wisps, unfounded rumors, the madness of crowds, and other extraneous factors—focusing at every moment on the fundamentals. In that case, prices would never deviate from fundamental values; that is, market prices would always be “right.” Under that exaggerated form of market efficiency, which critics sometimes deride as “free-market fundamentalism,” there would never be asset-price bubbles. Almost no one takes the strong form of the efficient markets hypothesis (EMH) as the literal truth, just as no physicist accepts Newtonian mechanics as 100 percent accurate. But, to extend the analogy, Newtonian physics often provides excellent approximations of reality. Similarly, economists argue over how good an approximation the EMH is in particular applications. For example, the EMH fits data on widely traded stocks rather well. But thinly traded or poorly understood securities are another matter entirely. Case in point: Theoretical valuation models based on EMH-type reasoning were used by Wall Street financial engineers to devise and price all sorts of exotic derivatives. History records that some of these calculations proved wide of the mark.””

— Alan S. Blinder