The Flat Earth Society has all but disappeared, but the efficient-market hypothesis is alive and well. Last week the Nobel Memorial Prize in Economic Sciences was awarded to its most tenacious advocate, Eugene F. Fama of the University of Chicago.
The hypothesis posits that the stock market is an "efficient" calculating machine, and that stock prices are rational computations of observable facts. It follows that future prices are unpredictable.
As Fama wrote in a version of his doctoral thesis 48 years ago, "If the random walk theory is valid and if security exchanges are 'efficient' markets, then stock prices at any point in time will represent good estimates of intrinsic or fundamental values."