[jakobsen]

> the efficient market hypothesis assumes that emotion, mass psychology, etc. don't enter into stock markets

Isn't mass psychology part of "public information"?? I know little about stock markets, but from the outside I would say that "how I think people will feel about a company" is pretty much what I would base my "bet" on whether a stock will go up or down.

[swatow]

no, according to the theory, "psychology" plays no role. People are assumed to have some information (signals) that inform them about the stock price. The efficient market hypothesis assumes that the stock price equals the expected value of discounted future dividends, conditional on all the signals of all the market participants (or conditional on all public signals, in the weak version).

It's quite different to how you describe you imagined the stock markets working. But I also believe it's a more accurate picture overall. Markets are pretty accurate at least with regard to individual stocks (see Robert Schiller's work for a non-mainstream but still reasonable theory of irrational exuberance, where all stocks in the market might be over/under-valued at a given time)