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Technology, Adaptation and the Eﬃcient Market Hypothesis

Tests of the eﬃcient market hypothesis (EMH) suﬀer from a known ﬂaw that has nevertheless received insuﬃcient attention in the literature. Just as in Zeno’s famous paradox of Achilles and the tortoise, while we are testing market eﬃciency the measure of eﬃciency has already moved on. Prediction technology and data availability perpetually improve beyond the level that was available to market participants during the sample period. This introduces a bias into the tests. If one believes in the existence of deterministic patterns and of technological progress, one has to expect to discover ineﬃciencies in historical data. We can only expect prices to reﬂect all available in- formation to the degree that current technology enables. From this argument follows a necessity to adjust the EMH. This article discusses possible adjustments and develops the concept of technological eﬃciency. Based on a review of empirical evidence, this concept is shown to resolve many anomalies and to help bridge the gap between the ﬁnancial economics literature and the rapidly advancing machine learning literature.