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By Justin Fox
Published: March 25 2010 11:44 | Last updated: March 25 2010 11:44
There are two efficient market hypotheses. One is the bold, unsubstantiated proposition that financial markets are close to perfect and all-knowing. This theory was ferociously and convincingly attacked by Robert Shiller and Lawrence Summers three decades ago and quietly abandoned by its progenitors in the 1990s "“ although it lived on zombie-style in textbooks, central bank policy and some parts of the financial press until recently. When, these days, a pundit or government official rails against "efficient market theory", this is what they mean.
A second efficient market hypothesis, however, deservedly survived the financial crisis. It holds simply that it is very hard for any investor (or regulator, or journalist) consistently to outsmart the market. Evidence keeps pouring in to back up this "No Free Lunch" theory, as economist Richard Thaler dubbed it in these pages last year, even as its "Price is Right" counterpart has been shown wanting.
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