The efficient market hypothesis: a heuristic appraisal

The heuristic view has evolved over the past few decades to provide a better understanding of how problems are posed and solved. It has become a robust perspective that accounts for the core of cognitive enterprise in a rational and logical way, specifically hypothesis generation. The heuristic view focuses on the process of generating and evaluating hypotheses, not just after the fact (ex post), but also before the fact (ex ante) and in the process of doing so (in fieri). I use these tools to shed light on one of the most influential and controversial hypotheses in finance, the efficient market hypothesis (EMH). I consider the EM’s generation from an historical perspective and argue that several features of the EMH stem from the specific way it was formulated and the heuristic procedures that were employed. A heuristic approach can reveal the EMH’s main features and weaknesses, which could have been identified during its formulation. These weaknesses are primarily the result of the inaccurate application of several heuristic procedures, such as inversion heuristics, datasets with suppressed evidence, and the absence of hypothesis refutation. This has greatly inflated the EMH’s plausibility and scope, extending its degenerative phase.