Why would an advocate of the efficient market hypothesis believe that even if many investors exhibit the behavioral biases, security prices might still be set efficiently?

Advocates of the efficient market hypothesis believe that stocks are always priced correctly by the market and they are never overvalued or undervalued. They will argue this is true even if investors exhibit behavioral basis. Behavioral bias is basically when an investor's decision is based on some irrational thought, e.g. they have a hunch that some stock will perform better, or they like a product so much that they believe it will be a hit in the future. According to the efficient market hypothesis, this investors that act irrationally, are arbitrageurs that want to make a profit from underpriced or overpriced stocks.

Even as these arbitrageurs operate, the efficient market hypothesis will still be valid, because their actions will make the market correct itself. I.e. the irrational actions of some investors will result in the market pricing the stocks correctly.

I personally do not believe in this theory, since stock prices are not always rational. E.g. today is November 21, and Tesla's is worth more than Toyota, GM, Volkswagen and BMW together. Why? Because they build electric cars. But Toyota, GM, Volkswagen and BMW also build electric cars and they outsell Tesla by millions of cars per year. I believe that in the future, Tesla's stock price will take a deep dive because you cannot live on unfulfilled promises all your life. At some point, reality bites. But according to the efficient market hypothesis this type of situation where stocks are clearly overpriced doesn't exist.

answer: technology

hope i

-lavira: )