The efficient market hypothesis and bubbles are logically compatible.

Evidence

Stiglitz repeatedly pronounces last rites over the EMH, but has little sway on the profession because he cannot see what is sauce for the goose is sauce for the gander. “The Chicago School and its disciples wanted to believe that the market for information was like any other market.” Yet, that is the fundamental initial premise of his own models. “The widespread belief in the EMH played a role in the Federal Reserve’s failure. If that hypothesis were true, then there were no such thing as bubbles.” But this just displays a deficiency of hermeneutic attention. Both the Fed and the profession can accept that the EMH, properly understood, and bubbles are entirely compatible—you just won’t know you are in one till it bursts. And paraphrasing Bill Clinton, it all depends what you mean by “bubble.” — Philip Mirowski, Never Let a Serious Crisis Go to Waste, 777

Categorization

• XREF: connects to: Market efficiency means prices fully reflect available information. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 291