FIN 305 Lecture Notes - Lecture 4: Efficient-Market Hypothesis
Document Summary
In an efficient market, the market prices of all traded assets (such as stocks and bonds) fully reflect all available information at any instant in time. Thus stock prices are a useful indicator of the value of the firm. Price changes reflect changes in expected future cash flows. Good decisions will tend to increase in stock price and vice versa. *note there are inefficiencies in the market that may distort the market prices from value of assets. Such inefficiencies are often caused by behavioral biases. Ted talk: a money economy is irrational as ours. Even though we"re incredibly smart as a species, we can also be incredibly dumb. We continue to make the same errors over and over again. Different possibilities and rationales: the environment is messed up, our minds are messed up. If you saw the numbers, you couldn"t tell a monkey"s economic decisions from a human"s.
