Market Efficient Really ?

Robert Shiller concluded from a longer history of stock market fluctuations that stock prices show far “too much variability” to be explained by an efficient-market theory of pricing, and that one must look to behavioral considerations and to crowd psychology to explain the actual process of price determination in the stock market.

What do we mean by saying markets are efficient ?

1. Markets can be efficient even if they sometimes make egregious errors in valuation. Markets can be efficient even if stock prices exhibit greater volatility than can apparently be explained by fundamentals such as earnings and dividends.
2. Economists view markets as amazingly successful devices for reflecting new info rapidly and, for the most part, accurately. Above all, we believe that financial markets are efficient because they don’t allow investors to earn above average returns without accepting above-average risks.
3. No one can consistently predict either the direction of the stock market or the relative attractiveness of individual stocks and thus no one can consistently obtain better overall returns than the market. And while there are undoubtedly profitable trading opportunities that occasionally appear, there are quickly wiped out once they become known. No one person or institution has yet to produce a long-term, consistent record of finding money-making, risk-adjusted individual stock-trading opportunities, particularly if they pay taxes and incur transactions costs.