Discussion Paper Week 5: What Causes Market Inefficiency - Assignment Example

Download file to see previous pages... For instance, in the case of an investor mistaking and placing the value of some firm’s prospective revenue at too low a number, there might be the occurrence of market inefficiency; read in other reads, it means that the interpretation on the part of the investors regarding the stocks of the firm may be worse investments as compared to what they are in real, which may result in market inefficiency. A lot of the investors try using market inefficiency such that they are able to take advantage of it. A renowned investor Warren Buffet makes the claim of his accumulating his fortune owing to market inefficiency. Regarding market inefficiency, Warren Buffet has stated, “Id be a bum on the street with a tin cup if the markets were efficient”.
The main concern behind this is that market forces (external forces) usually tend to drive stock prices up or below their true value. Same applies to other types of assets as well. This can easily supported with the trend line of market productivity which unexpectedly sometimes collides down or spears up. All this happens due to some unseen and unanalyzed market forces that tend to affect values and prices of assets.
Usually market inefficiencies do exist. Some are structural in nature others are transitory and tend to wane away as soon as they have been discovered. The fact that the market tends to move securities to their original worth and value, explains that a security will no longer remain undervalued or overvalued. This is why that we see market prices changing too rapidly and matching a stock’s or an asset’s original value. An efficient market usually avoids the incompatibilities between values as well as prices of securities and improper access to information for all the investors. This supports the proposition that in an efficient market every investor has equal access to complete information.
Some analysts also argue in support of existence of market in efficiency and say ...Download file to see next pagesRead More