Language
Country/Area
No result found
Is it true that investors can't beat the market? Uncover this enduring mystery!
In financial economics, there is a widely discussed hypothesis - the efficient market hypothesis (EMH). According to this hypothesis, asset prices reflect all available information. This means that investors cannot continue to "beat the market." However, is this theory absolutely correct? And does it work in every market? These issues have attracted extensive research and discussion.
The basic logic of the efficient markets hypothesis is that if markets are efficient, then asset prices should only respond to new information. In other words, prices should not be predictable from past information.
The roots of the efficient market hypothesis can be traced back to the early 20th century, when French mathematician Louis Bachelier first proposed the random walk theory in his dissertation. This theory was then further popularized by an economist named Eugene Fama. In his 1970 paper, he organized and reviewed theoretical and empirical research on market efficiency, defined the efficient market hypothesis, and distinguished three forms - weak, semi-strong and strong market efficiency.
For proponents of efficient markets, however, decades of empirical research have not consistently supported the theory. Starting in the 1950s, researchers have tried to explore whether there are unexplained anomalies in the market. Research at that time showed that professional investors may not be able to consistently beat the market. However, after entering the 1980s, the predictability of market returns seemed to have improved, and more return predictors were discovered.
Many studies have shown that the existence of market anomalies makes the efficient market hypothesis no longer fully valid, and these anomalies are even more difficult to predict under the influence of new technologies and investor learning.
Behind the efficient market hypothesis is the support of the random walk theory, which believes that changes in stock market prices are random and follow a certain random process. Even when faced with a wide range of information, a stock's price may not accurately reflect its actual value. This has made the efficiency of markets a controversial issue, as many investors, including Warren Buffett and George Soros, have questioned the efficient markets hypothesis, emphasizing that human behavior and psychological biases can affect market prices.
Behavioral economics emphasizes human biases in information processing, overconfidence, overreaction, and various predictable errors, which often make investors unable to make rational decisions.
However, market efficiency is not an absolute concept. Many scholars believe that there are various cognitive biases among investors, which allow certain profitable opportunities to exist in the market. By studying small-cap stocks, value stocks and other asset classes, academics have found that inherent risk factors can drive above-market returns.
As past research has shown, investors are not just passive market takers. Instead, there is a group of active investors seeking high returns who turn this information into action when market opportunities arise. This behavior reflects the interactions and psychological drives among investors, which in turn affects changes in market prices.
Therefore, whether there is a situation in the market where it is impossible to continuously beat the market has become a question that researchers are thinking about day and night.
Since 2010, many new research reports have pointed out that market predictability appears to be further weakening. Some scholars such as Goyal and Welch suggest that even if there are explainable variables, these variables often fail to consistently provide market-beating returns in practice. This situation has frustrated many investors who want to beat the market, especially as high-frequency trading technology continues to advance. Information acquisition and execution speed are major advantages in market competition.
However, it cannot be denied that the effectiveness of the market is closely related to the flow of information. With the development of technology, the way investors obtain and analyze information has changed, which has an important impact on the operating model of the market. Under such circumstances, if individual investors want to beat the market, how to use this information and whether they can grasp the ever-changing market information have become the key.
In the final analysis, although the efficient market hypothesis provides a framework for understanding financial markets, we cannot help but ask, is there still a game between human nature and wisdom in these complex information and market structures? Can investors actually find a way to beat the market?
