The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Efficient Markets Hypothesis

  • Andrew W. Lo
Reference work entry


The efficient markets hypothesis (EMH) maintains that market prices fully reflect all available information. Developed independently by Paul A. Samuelson and Eugene F. Fama in the 1960s, this idea has been applied extensively to theoretical models and empirical studies of financial securities prices, generating considerable controversy as well as fundamental insights into the price-discovery process. The most enduring critique comes from psychologists and behavioural economists who argue that the EMH is based on counterfactual assumptions regarding human behaviour, that is, rationality. Recent advances in evolutionary psychology and the cognitive neurosciences may be able to reconcile the EMH with behavioural anomalies.


Adaptive markets hypothesis Agent-based models Altruism Arbitrage Asset price anomalies Behavioural biases Behavioural economics Behavioural finance Bid–ask bounce Biology and economics Bounded rationality Capital asset pricing model Consumer choice Creative destruction Deductive inference Dividend smoothing Dividend-discount model Dutch books Economic complexity Efficient markets hypothesis Emotions Equilibrium Equity risk premium Evolutionary economics Evolutionary game theory Evolutionary psychology Fama, E. F. Financial economics Herding Hyperbolic discounting Inductive inference Information aggregation Informational efficiency January effect Joint hypotheses Learning Long-term memory Loss aversion Market efficiency Martingales Miscalibration of probabilities Natural selection Neuroeconomics Noise traders Optimization Overconfidence Overreaction Post-earnings announcement drift Preferences Present value Price reversals Psychological accounting Punctuated equilibrium Random walk hypothesis Rational expectations Regret Relative efficiency Risk aversion Risk preferences Risk–reward relation Samuelson, P. A. Satisficing Serial correlation Simon, H. Size effect Social norms Sociobiology Statistical inference Stock price volatility Survival of the fittest Uncertainty Utility maximization Variance bounds Variance decomposition 

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I thank John Cox, Gene Fama, Bob Merton, and Paul Samuelson for helpful discussions.


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Authors and Affiliations

  • Andrew W. Lo
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  1. 1.