Session 7: Market Efficiency - Laying the Groundwork
from Aswath Damodaran Hosted by Aswath Damodaran
Our beliefs about market efficiency and inefficiency determine how we invest. In this session, we look at what an efficient market is and note that market efficiency does not preclude market mistakes (price can be different from value) or investors beating the market (though they tend to be few and far between). We also look at the requirements for a market to be efficient: liquidity in markets and traders/investors who are trying to exploit the inefficiencies. Finally, we eke out the implications: markets are likely to be less efficient if trading costs and trading frictions are high and value-seeking investors are few and far between. While most markets are efficient for most people at most points in time, there are pockets of inefficiency that we can be exploited in investing.
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