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 fair, market and/or price:
“Most books belong to the house and street only, and in the fields their leaves feel very thin. They are bare and obvious, and have no halo nor haze about them. Nature lies far and fair behind them all. But this, as it proceeds from, so it addresses, what is deepest and most abiding in man. It belongs to the noontide of the day, the midsummer of the year, and after the snows have melted, and the waters evaporated in the spring, still its truth speaks freshly to our experience.”
—Henry David Thoreau (1817–1862)
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—Henry David Thoreau (1817–1862)
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—J.G. (James Graham)