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Jodi Beggs

On Stock-Picking Cats and the Efficient Markets Hypothesis...

By January 19, 2013

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The Efficient Markets Hypothesis is a well-known concept in finance that suggests that it's difficult (if not impossible) to "beat the market" when it comes to investing:

Proposed by the University of Chicago's Eugene Fama in the 1960's, the general concept of the efficient markets hypothesis is that financial markets are "informationally efficient"- in other words, that asset prices in financial markets reflect all relevant information about an asset. One implication of this hypothesis is that, since there is no persistent mispricing of assets, it is virtually impossible to consistently predict asset prices in order to "beat the market"- i.e. generate returns that are higher than the overall market on average without incurring more risk than the market.

Overall, academic research is somewhat divided on whether the efficient markets hypothesis holds in all cases, but economists generally agree that, at the very least, the direction of stock price movements is difficult to predict in the short run. Therefore, it probably doesn't surprise them to learn that a group of finance professionals was outperformed in a stock-picking contest by a cat named Orlando.

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