Thursday, 7 March 2013

In Defense of Fundamental Analysis: A Critique of the EMH

Economist Frank Shostak critiques the Efficient Market Hypothesis (EMH):
The main shortcomings of the EMH are similar to those of the long-run competitive theories that focus exclusively on equilibrium outcomes while ignoring the entrepreneurial activity that generates those outcomes. The EMH gives the impression that there is a difference between investing in the stock market and investing in a business. However, the stock market doesn't have alife of its own. The success or failure of investment in stocks depends ultimately on the same factors that determine success or failure of any business.
Statistical tests that supposedly validate the EMH framework are based on a flawed method and a failure to understand that the main cause behind the instability in financial markets is the monetary policies of the central bank.
Read the full article here.