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.
Read more about this topic: Fair Value
Famous quotes containing the words fair, market and/or price:
“I like not fair terms and a villain’s mind.”
—William Shakespeare (1564–1616)
“... married women work and neglect their children because the duties of the homemaker become so depreciated that women feel compelled to take a job in order to hold the respect of the community. It is one thing if women work, as many of them must, to help support the family. It is quite another thing—it is destructive of woman’s freedom—if society forces her out of the home and into the labor market in order that she may respect herself and gain the respect of others.”
—Agnes E. Meyer (1887–1970)
“I cannot think of punishing him ... merely for coveting that liberty for which we have paid the price of so much blood, and have proclaimed so often to be the right, and worthy pursuit of every human being.”
—James Madison (1751–1836)