If prices reflected all information, nobody would be paid to gather it, so prices could not reflect it.
Grossman and Stiglitz's 1980 result. Markets must be slightly inefficient to pay for the analysis that makes them efficient, so perfect efficiency is self-undermining rather than an ideal limit.
In practice
- An asset manager charging fees for research that the price already reflects is either adding nothing or the price does not reflect it.
- A market where everyone indexes has no one setting prices, which is what makes indexing work.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- Rules for choosing, and the paradoxes that humbled the theory