Efficient Markets Hypothesis Proven By Twitter Jitter

Many people misunderstand the efficient markets hypothesis (EMH). They think it says that markets are efficient methods of doing everything, including health care and allocating capital. Instead, it says that markets process information about what prices should be in a market.

Yesterday’s Twitter Jitter only proves this so. The Associated Press tweeted based on bogus information that two bombs had gone off at the White House, injuring the President. Had this been true then there would have been a decline in the value of US companies. A fall in that first minute after the newsbreak is indeed evidence of information efficiently processed. Then it took only a minute or so for the update stating that it was false. Prices bounced back again, showing again that the information was efficiently processed.

The EMH only says that markets are efficient at processing information. All currently known information is contained in prices.

Can Twitter prove more hypotheses? Find out more from Forbes’ Tim Worstall.