Ten
Investor Learning—and Unlearning

Besides the efficient markets– random walk argument, another rationalization for the exuberance in the market is that the public at large has learned that the long-term value of the market is really greater than they had thought it was, and greater than conventional indicators would have suggested it should be. According to this theory, the market is higher today because the public has now learned some simple facts about historical average returns and diversification. This argument differs from the efficient markets argument in supposing that the market was previously priced too low because of public ignorance. The argument is essentially that “The market was not efficient a few years ago; it was too low; but (maybe) it is efficient now.”

It is potentially plausible, at least at first look, that society may have learned that the market is much more valuable than it was once thought to be. Society as a whole does learn, and the cumulative effect of such learning is the reason that modern society has made such progress when compared with former centuries. But the question remains whether society has really learned something

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