The Grossman-Stiglitz Paradox is a paradox introduced by
Sanford J. Grossman and
Joseph Stiglitz
Joseph Eugene Stiglitz (; born February 9, 1943) is an American New Keynesian economist, a public policy analyst, political activist, and a professor at Columbia University. He is a recipient of the Nobel Memorial Prize in Economic Sciences (2 ...
in a joint publication in ''
American Economic Review
The ''American Economic Review'' is a monthly peer-reviewed academic journal first published by the American Economic Association in 1911. The current editor-in-chief is Erzo FP Luttmer, a professor of economics at Dartmouth College. The journal is ...
'' in 1980 that argues perfectly informationally efficient markets are an impossibility since, if prices perfectly reflected available information, there is no profit to gathering information, in which case there would be little reason to trade and markets would eventually collapse.
Rational efficient markets formulation
The rational efficient markets formulation recognizes that investors will not rationally incur the expenses of gathering information unless they expect to be rewarded by higher gross returns compared with the free alternative of accepting the market price. Furthermore, modern theorists recognize that when intrinsic value is difficult to determine, as is the case of common stock, and when trading costs exist, even further room exists for price to diverge from value.
A corollary is that investors who purchase
index funds or ETFs are benefitting at the expense of investors who pay for the services of financial advisors, either directly or indirectly through the purchase of actively managed funds.
See also
*
Noise (economic)
Economic noise, or simply noise, describes a theory of pricing developed by Fischer Black. Black describes noise as the opposite of information: hype, inaccurate ideas, and inaccurate data. His theory states that noise is everywhere in the economy ...
References
External links
*
{{DEFAULTSORT:Grossman-Stiglitz Paradox
Information economics
Asymmetric information
Management cybernetics
1980 in economic history