Chapter 4 explains that stock markets are like laboratories where new ideas get tried out. Stocks are experiments in the creation of wealth. Investors are like scientists who put money behind experiments they think will succeed. This constant assessment of where the best opportunities lie means that every new scrap of information about a company's fortunes is quickly reflected in the price of the stock. This is known as stock market efficiency.
Efficiency is important because it means that resources are being put to their best use.
For example, news that the TB bacillus is getting stronger should signal investors to put resources behind biomedical companies with a chance of developing a drug against the bacillus. The chapter presents strong evidence to support the notion that stock markets are efficient. The chapter also points out how Canadian stock market efficiency could be improved. Chapter 5 looks at stock markets in emerging economies such as those of Eastern Europe, Latin American, and Asia. A clever solution is to give citizens vouchers representing a share of state owned industries.