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:
“This fair homestead has fallen to us, and how little have we done to improve it, how little have we cleared and hedged and ditched! We are too inclined to go hence to a “better land,” without lifting a finger, as our farmers are moving to the Ohio soil; but would it not be more heroic and faithful to till and redeem this New England soil of the world?”
—Henry David Thoreau (1817–1862)
“Have you not heard of that madman who lit a lantern in the bright morning hours, ran to the market place, and cried incessantly: “I seek God! I seek God!””
—Friedrich Nietzsche (1844–1900)
“This state is full of these log cabin Abe Lincolns with price tags on ‘em. The louder he yells, the higher his price.”
—Robert Rossen (1908–1966)