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Market Efficiency

Fama: “The market price at any time instant reflects


all available information in the market”.
Cannot “make money” using “stale information”.
Three forms
Weak form: past prices and returns.
Semi-strong form: all public information.
Strong form: all public AND private information.
Michael Jensen: “there is no other proposition in
economics which has more empirical support than the EMH”.
Expected Utility Theory
• A theory of choice under uncertainty for a
single decision-maker.
• Expected Utility = p1*u1 + p2*u2 + … +
pn*un.
p: probability of an event
u: utility derived from the event
Rational Expectations Paradigm
• All investors are identical.
• All investors are utility maximizers.
• All investors use “Bayes rule” to form new beliefs
as new information becomes available.
• All investor predictions are accurate.
Expected Utility + Rational Expectations
=> Market Efficiency
Lessons from day one
• What is behavioral finance and its effect
on price “e”
• How basic assumptions of mainstream
economics fails. Bayes theorem failed.
“Remember Doors”.
• Impact of Behaviour “Ambiguity effect.

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