Efficient Market

Theory that market prices reflect the knowledge and expectations of all investors. Those who adhere to this theory consider it futile to seek undervalued stocks or to forecast market movements. Any new development is reflected in a firm's stock price, they say, making it impossible to beat the market. This vociferously disputed hypothesis also holds that an investor who throws darts at a newspaper's stock listings has as good a chance to outperform the market as any professional investor. The theory, also known as the Random Walk theory, was first set forth in 1900 by the French mathematician Louis Bachelier, and received modern treatment in Burton Malkiel's book A Random Walk Down Wall Street. See also Active Management; Behavioral Finance (Or Investing).