The efficient markets hypothesis (EMH), developed by Eugene Fama in the 1960s, simply states that prices reflect all available information. Despite its simplicity, the EMH has been difficult to test and generated decades of debate. In this video, Gene and Richard Thaler, a founding father of behavioral economics, discuss whether markets are efficient. Despite some areas of discord, Thaler sums up an important point of agreement: “Stock markets, good or bad, are the best thing we got going. So, nobody’s devised a way of allocating resources that’s better.”

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EFF: I spoke with EconTalk host Russ Roberts about how the efficient market hypothesis relates to macroeconomic events of the past few years, with some additional thoughts on behavioral finance and the evolving nature of financial academic research.

Although it would be great if we could all hire above average active managers, that only happens in Lake Wobegon. Superior managers may exist, but most investors might as well be picking their managers at random. I describe the challenge of differentiating luck from skill, and explain how intense competition among investors makes the problem even more difficult.

KRF: I explain why active investing is always a negative sum game. We often hear that now is a good time (or a bad time) for active investing. That does not make sense. In aggregate, active investors always underperform by their fees and expenses.

KRF: What does it mean to say there is a flight to quality? For every seller there must be a buyer. After exploring this simple point, I explain how expectations about future cashflows and future returns affect the current price.