Attempts to answer the question of how information is reflected in security prices to see if alpha generation is possible. There are three forms of EMH: - **Weak efficiency** - This type of EMH claims that all past prices of a stock are reflected in today's stock price. Therefore, [[technical analysis]] cannot be used to predict and beat the market. - **Semi-strong efficiency** - This form of EMH implies all public (but not non-public information is calculated into a stock's current share price. Neither [[Fundamental Analysis|fundamental]] nor technical analysis can be used to achieve superior gains. - **Strong efficiency** - all information in a market, whether public or private, is accounted for in a stock's price. ## Rationality versus Efficiency One of the issues with the EMH is that it attempts to answer the wrong question. The idea that we can measure how information is reflected in stock prices assumes that there is a "right" price that is knowable. This requires a known quantity of information to be directly relatable to a known price which is not practical. EMH makes propositions about the process by which information is reflected in security prices and assumes a knowable "right" price to conclude that alpha generation is not possible, when the very existence of alpha is dependent on there being "right" and "wrong" prices. It is a circular argument. The market is efficient at distributing [[risk]]. Price is the mechanism through which risk travels from those unable or unwilling to warehouse that risk to those who can or want to hold that risk. The market is shaped by human behavior and their attitudes towards risk. While human behavior is irregular, unpredictable, and can be irrational; it tends to be "predictably irrational." The market is an expression of human behavior. Explore Further: [[Auction Process]] | [A Grand Unified Theory of Market Behavior](https://breakingthemarket.com/a-grand-unified-theory-of-market-behavior/) | [What the Efficient Markets Hypthesis Gets Wrong](https://medium.com/@joshmyers919/what-the-efficient-markets-hypothesis-gets-wrong-c5e7cde9aad0) Tags: #evergreen Your support for Cedars Hill Group is greatly appreciated <form action="https://www.paypal.com/donate" method="post" target="_top"> <input type="hidden" name="hosted_button_id" value="74PGN8ZXHQVHS" /> <input type="image" src="https://www.paypalobjects.com/en_US/i/btn/btn_donate_LG.gif" border="0" name="submit" title="PayPal - The safer, easier way to pay online!" alt="Donate with PayPal button" /> <img alt="" border="0" src="https://www.paypal.com/en_US/i/scr/pixel.gif" width="1" height="1" /> </form>