Are investors good at ‘pricing in’ information in real time? Read any news article commenting on the latest move in a stock, bond or commodity, and the answer would appear to be ‘yes’; something new happens or is published, and the balance of risk and reward is repriced, just as believers of the efficient market hypothesis would suggest.
However, although we often assume that in large markets the dazzlingly wide array of buyers and sellers – both human-directed and automated – is good at interpreting data and applying it to the expected return from an asset, we also instinctively know that things are a bit messier.
That's because the array of buyers and sellers might not be quite so dazzling. Data might be hard to interpret, take a while to interpret, or lack the requisite information to correctly re-price expectations about the future. What’s more, there is memory, anchoring and human bias to deal with. New information should change our views (both individual and collective), but it also must get past myriad pre-conceptions about its validity, and how it might apply to a given situation, company or sector.