Since the early 1970s we have the following changes in markets: 1. Nearly everything is now traded on electronic exchanges. Prices are available to everyone in real time. 2. The world wide web makes it easy for information to be exchanged globally nearly instantly. 3. Computers are constantly on the prowl looking for mispricings and arbitrage opportunities, and grab them when they see them. Consequently there is a good reason to believe the markets are significantly more efficient than they were 40 years ago. Hence, prices should be more purely random than they were 40 years ago.
<a href="http://en.wikipedia.org/wiki/Reification_%28fallacy%29">Reification</a> is why <a href="http://en.wikipedia.org/wiki/Reification_%28computer_science%29">quants</a> continue to miss the mark. The two recent market crashes were amplified precisely because of this tendency. Not to mention the academics in economics departments who never stepped outside of their disciplines, who enabled these perversions of reality to be treated as truth.
You're confusing "Efficient Market Hypothesis" with Random Walk/Brownian Motion. Rationality and a random walk have nothing to do with one another in this case... For the other poster, how do you differentiate between a random pattern and trad-able/predictable patterns?
If they make money, it is a trade-able/predictable pattern, if not, it is a random pattern. hindsight bias has a tight hold on many traders.
You inserted "all" in my statement and that changes the meaning completely. It is not necessary for all market participants to act rationally for the efficient market hypothesis to be true. Quote me correctly next time if you don't want to be called a liar.
In the context of markets, the EMH and Random Walk are intertwined at the hip. It is you who are actually interjecting Brownian Motion into the theory as a modeling adjunct. There have been attempts to model brownian motion in price -- this did not give rise to the random walk hypothesis, but followed it.
Actually, the Efficient Market Hypothesis has everything to do with the Random Walk hypothesis. In an efficient market the only things that drive price change are unforeseeable, and thus practically random, events. (This does not mean that the random walk has to be a simple constant volatility Wiener process. There can be spikes in volatility that give the price distribution fat tails but the price action is still unpredictable.)
Wait, you mean "all" didn't exist in there originally? How the hell did it turn blue by itself, and with brackets to boot? You've totally caught me in a baldfaced lie. The theory, like everything starting from germane econ101 supply and demand curves, begins by assuming a transcendental "all", and then models are built to refine the hypothesis where that assumption is softened. Nowhere does the EMH begin from data, from the ground up.
There is no such thing as the random walk. Everything happening around us has a pattern. This pattern is currently 'only partially' explained by the Elliot Wave and similar philosophies.
The sentence quoted was: "To the contrary, the random walk theory assumes that market participants act rationally, have good information, and that that information is quickly incorporated into prices." Now, perhaps I should have been explicit and said "most market participants", but I didn't say "all market participants". The EMH doesn't have to assume any "transcendental all", it just has to assume that the big money is generally invested rationally, based upon all available information. The EMH allows for the existence of irrational market players who get taken to the cleaners by the rational market players. There is a high degree of efficiency in the markets with the result that market prices do indeed look quite random. Successful trading requires finding deviations from true randomness (and thus inefficiencies in the market). The fact that some successful traders exist shows that there are still some inefficiencies in the market. That fact that most traders fail shows that those inefficiencies are difficult to find and exploit.