Fair Value Vs Market Price
There are two schools of thought about the relation between the market price and fair value in any kind of market, but especially with regard to tradable assets:
- The efficient market hypothesis asserts that, in a well organized, reasonably transparent market, the market price is generally equal to or close to the fair value, as investors react quickly to incorporate new information about relative scarcity, utility, or potential returns in their bids; see also Rational pricing.
- Behavioral finance asserts that the market price often diverges from fair value because of various, common cognitive biases among buyers or sellers. However, even proponents of behavioral finance generally acknowledge that behavioral anomalies that may cause such a divergence often do so in ways that are unpredictable, chaotic, or otherwise difficult to capture in a sustainably profitable trading strategy, especially when accounting for transaction costs.
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Famous quotes containing the words market price, fair, market and/or price:
“A sentimentalist, my dear Darlington, is a man who sees an absurd value in everything, and doesn’t know the market price of any single thing.”
—Oscar Wilde (1854–1900)
“Monday’s child is fair in face,
Tuesday’s child is full of grace,
Wednesday’s child is full of woe,
Thursday’s child has far to go,
Friday’s child is loving and giving,
Saturday’s child works hard for its living;
And a child that is born on a Christmas day,
Is fair and wise, good and gay.”
—Anonymous. Quoted in Traditions, Legends, Superstitions, and Sketches of Devonshire, vol. 2, ed. Anna E.K.S. Bray (1838)
“Ae market night,
Tam had got planted unco right,
Fast by an ingle, bleezing finely,
Wi’ reaming swats that drank divinely;”
—Robert Burns (1759–1796)
“They give us a pair of cloth shorts twice a year for all our clothing. When we work in the sugar mills and catch our finger in the millstone, they cut off our hand; when we try to run away, they cut off our leg: both things have happened to me. It is at this price that you eat sugar in Europe.”
—Voltaire [François Marie Arouet] (1694–1778)