what is an inefficient market 
according to economic theory an inefficient market is one in which an asset s prices do not accurately reflect its true value which may occur for several reasons inefficiencies often lead to deadweight losses in reality most markets do display some level of inefficiencies and in the extreme case an inefficient market can be an example of a market failure the efficient market hypothesis emh holds that in an efficiently working market asset prices always accurately reflect the asset s true value for example all publicly available information about a stock should be fully reflected in its current market price with an inefficient market in contrast all the publicly available information is not reflected in the price suggesting that bargains are available or that prices could be over valued understanding inefficient marketsbefore looking at inefficient markets as promoted by alphanomics we must first lay out what economic theory proposes an efficient market must look like the efficient markets hypothesis emh takes on three forms proponents of the emh believe that the market s high degree of efficiency makes outperforming the market difficult most investors would therefore be well advised to invest in passively managed vehicles such as index funds and exchange traded funds etf which don t attempt to beat the market emh skeptics on the other hand believe that savvy investors can outperform the market and therefore actively managed strategies are the best option thus in an inefficient market some investors can make excess returns while others can lose more than expected given their level of risk exposure if the market were entirely efficient these opportunities and threats would not exist for any reasonable length of time since market prices would quickly move to match a security s true value as it changed quantitative analysts will look to the concept of entrophy or randomness to predict the probable price movement direction or the repetition of a pattern the emh has several problems in reality first the hypothesis assumes all investors perceive all available information in precisely the same manner the different methods for analyzing and valuing stocks pose some problems for the validity of the emh if one investor looks for undervalued market opportunities while another evaluates a stock on the basis of its growth potential these two investors will already have arrived at a different assessment of the stock s fair market value therefore one argument against the emh points out that since investors value stocks differently it is impossible to determine what a stock should be worth in an efficient market while many financial markets appear reasonably efficient events such as market wide crashes and the dotcom bubble of the late 90s seem to reveal some sort of market inefficiency example active portfolio managementif markets are truly efficient then there is no hope to beat the market as an investor or trader the emh states that no single investor is ever able to attain greater profitability than another with the same amount of invested funds under the efficient market hypothesis since they both have the same information they can only achieve identical returns but consider the wide range of investment returns attained by the entire universe of investors investment funds and so forth if no investor had any clear advantage over another would there be a range of yearly returns in the mutual fund industry from significant losses to 50 profits or more according to the emh if one investor is profitable it means every investor is profitable but this is far from true regarding passively managed versus actively managed vehicles the inefficiency of markets reveals itself for example large cap stocks are widely held and closely followed new information about these stocks is immediately reflected in the price news of a product recall by general motors for example is likely to immediately result in a drop in gm s stock price in other parts of the market however particularly small caps some companies may not be as widely held and closely followed news whether good or bad may not hit the stock price for hours days or longer this inefficiency makes it more likely that an investor will be able to purchase a small cap stock at a bargain price before the rest of the market become aware of and digests the new information likewise technical analysis is a style of trading that is completely predicated on the concept of using past data to anticipate future price movements technical analysis uses patterns in market data from the past to identify trends and make predictions for the future as a result emh is conceptually opposed to technical analysis proponents of emh are also of the belief that it s pointless to search for undervalued stocks or predict trends in the market through fundamental analysis 