Each part II question is worth 25 points. Good luck studying for the exam. He is a director of the Vanguard Group and of the American Stock Exchange. The student stoops to pick it up. This story illustrates what financial economists mean by efficient markets.
Markets can be efficient even if investors are subject to overconfidence and errors in judgement.
Markets can be efficient even if they make errors in the valuation of individual stocks and exhibit greater volatility than can apparently be explained by fundamentals such as earnings and dividends. Many of us economists who believe in this efficient market theory do so because we view markets as amazingly successful devices for reflecting new information rapidly and, for the most part, accurately. While the efficient market theory has been the mantra of my generation, it has come under increasing attack from a new breed of economists. They believe that stock prices sometimes underreact to news, creating some short-run momentum, as well as sometimes overreact to events, creating price reversals that can be exploited by investors. Behavioralists also emphasize that the arbitrage activities of rational professional investors, who might be expected to bring stock prices back to fundamental values, are often impossible to execute and, in any event, risky and therefore limited.