The efficient market debate

Date posted: April 3, 2012

There’s a debate going on among economists about how investment markets work, and the debate has big implications for average investors. N.C. State University economist Mike Walden sheds light on what the discussion is about.

“This has been a long-running debate. I think it got heightened with the market crash in 2008, but essentially it says whether — or asks whether — investors can predict the market, predict the various investment markets, like the stock market, and therefore they should move their money around based on what their predictions are — where the economy is going, and what particular markets are going to do. Or is trying to predict the future economy and predict future market moves — is that really hopeless because it’s too complicated?

“Those people who think that, yes, they can predict – and, of course, by prediction I don’t mean 100 percent correct, but at least more times than not — those are going to be active traders. There are examples of people who were able to predict the big crash in 2008 and move their money out. Now they’ve been back in, and they’ve … been happy.

“But there are others who say, ‘Look. … There are only a few number of folks who can do that. They can maybe not do that all the time and that because the world is so complicated economically, it’s better just to buy and hold.’ Those people who do buy and hold believe that markets tend to be efficient. That is all information is out there. No one can get more information better than someone else.

“So, this is an academic debate, number one, but it’s a very practical debate for investors in terms of how they invest their money. Are they going to be active traders or are they going to be buying-and-hold folks?”

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