Robert Shiller Yale lecture on Efficient Market Hypothesis.

Several theories in finance relate to stock price analysis and prediction. The efficient markets hypothesis states that stock prices for publicly-traded companies reflect all available information. Prices adjust to new information instantaneously, so it is impossible to "beat the market." Furthermore, the random walk theory asserts that changes in stock prices arise only from unanticipated new information, and so it is impossible to predict the direction of stock prices. Using statistical tools, we can attempt to test the hypotheses and to predict future stock prices. These tests show that efficient markets theory is a half-truth: it is difficult but not impossible for some people to beat the market.

Robert Shiller. Financial Markets (ECON 252)

What is the efficient markets hypothesis? The term actually is a fairly recent origin--that is, a few decades ago--but the idea goes back much further. The idea is that in asset markets that have good regulations and market makers and developed markets that have a lot of depth and liquidity--in these markets, the prices that you see are perfect indicators of true value. In other words, efficient market says that the market efficiently incorporates all information and the prices are like the best information about the value of something. In other words, efficient markets hypothesis tells you: trust markets, don't trust people, trust markets.

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This course was recorded in Spring 2008.