Grandfathers of the Efficient Market Hypothesis

“Eugene Fama is widely considered the father of the efficient market hypothesis.” 

….If I had a nickle for every time I’ve had to read this line in the last 24 hours….I might have $1.20 by now.

Yesterday it was announced that Fama would be awarded the Nobel Prize in economics. Virtually every media outlet has described him as “The father of the efficient market hypothesis.”

I want to clarify that, if Fama is the “father,” then the hypothesis sure had a lot of other relatives – grandfathers, great uncles, and distant cousins.

I am not trying to take anything away from Fama by saying this. But there does seem to be a sense, especially by those who refute the efficient market hypothesis, that it was dreamed up in the 1960s by one crazy guy (Fama) at the University of Chicago. And that it if it wasn’t for Fama and his whacky ways, we would never have this idea.

The reality is that the concepts in the efficient market hypothesis were well understood by many in the investment industry long before Fama came on the scene. For many, it was just basic “common sense” that the investment markets were highly unpredictable and that the “experts” don’t do any better than the averages. For practical purposes, this is mostly what the efficient market hypothesis is all about. If you think it is about Ayn Rand disciples saying that markets are always perfect at everything then you have completely misunderstood the hypothesis – and it will be to your own detriment.

Below are some links to much earlier works that touch on the efficient market hypothesis.

Alfred Cowles, “Can Stock Market Forecasters Forecast?” This 1932 paper shows that the “experts” did no better than you would expect from chance alone.

Richard Wycoff, “Stock Market Technique,” April, 1933. This 1933 newsletter has insightful commentary on the above 1932 paper.

Louis Bachelier, a french mathematician who modeled the random movement of investment prices in 1900.

 Image from Public Domain

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