The efficient-market hypothesis is a mental model that states it is impossible to beat the market because prices always reflect all available information.
The efficient-market hypothesis means that investors cannot achieve abnormal profits by trading in the market, since prices already reflect the intentions of all market participants.
The efficient-market hypothesis is based on the idea that markets are efficient, meaning that they are quick to incorporate new information and prices always reflect all available information.
The efficient-market hypothesis has been used to explain a variety of phenomena in financial markets, including the fact that it is difficult to beat the market.
The concept of efficient-market hypothesis can help you make daily decisions. For example, if you are considering whether to buy a stock, the efficient-market hypothesis would say that it is not possible to predict whether the stock will go up or down in the future.
This means that you should only buy the stock if you are willing to hold it for the long term, since it is not possible to time the market.
The efficient-market hypothesis can also help you understand why it is difficult to find active managers who can consistently outperform the market. This is because, if markets are efficient, there is no reason why any one manager should be able to consistently beat the market.
There are some criticisms of the efficient-market hypothesis. One criticism is that it does not take into account the fact that some investors have more information than others. This means that it is possible for these investors to make profits by trading on this information.
Another criticism of efficient-market hypothesis is that it assumes that all market participants are rational. However, there is evidence that this is not always the case. For example, irrational investors may make decisions based on emotion, rather than on the facts.
Despite its criticisms, efficient-market hypothesis is a useful mental model that can help you understand how markets work and make decisions about your investment portfolio.