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:
“Apparel vice like virtue’s harbinger;
Bear a fair presence, though your heart be tainted;
Teach sin the carriage of a holy saint;
Be secret-false.”
—William Shakespeare (1564–1616)
“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)
“I was like a social worker for lepers. My clients had a chunk of their body they wanted to give away; for a price I was there to receive it. Crimes, sins, nightmares, hunks of hair: it was surprising how many of them has something to dispose of. The more I charged, the easier it was for them to breathe freely once more.”
—Tama Janowitz (b. 1957)