Understanding Economic Equilibrium

CHAPTER 35

Buy Low, Sell High: Efficient Markets

It happens more often than not. The first question from the audience attending a talk on economics is, “What’s the market going to do?” And invariably, the presenter is ready with the quip: “If I knew what the market was going to do tomorrow I wouldn’t be here today.” We might have longer-term views about asset prices but no one can predict how the market will move from one day to the next. The reason: Markets are “efficient.”

In his 1973 book, A Random Walk Down Wall Street, Burton Malkiel explained how the efficient market hypothesis applied to investing, that security prices reflect the collective judgment of the full complement of investors in global financial markets, which includes everyone ...