hypothesis does not exactly arouse enthusiasm in the community of professional portfolio managers. It implies that a great deal of the activity of portfolio managers-the search for undervalued securities-is at best wasted effort, and quite probably harmful to clients because it costs money and leads to imperfectly diversi- fied portfolios. Consequently, the EMH has never been widely accepted on Wall Street, and debate continues today on the degree to which security analysis can improve investment performance. Before discussing empirical tests of the hypothesis, we want to note three factors that together imply that the debate probably never will be settled: the magnitude is- sue, the selection bias issue, and the lucky event issue.   The Magnitude Issue We have noted that an investment manager overseeing a $5 billion portfolio who can improve performance by only .001% per year will increase in- vestment earnings by .001 $5 billion $5 million annually. This manager clearly would be worth her salary! Yet can we, as observers, statistically measure her contribution? Prob- ably not: A.001% contribution would be swamped by the yearly volatility of the market. Remember, the annual standard deviation of the well-diversified S&P 500 index has been more than 20% per year. Against these fluctuations a small increase in performance would be hard to detect. Nevertheless, $5 million remains an extremely valuable improvement in performance. All might agree that stock prices are very close to fair values, and that only managers of large portfolios can earn enough trading profits to make the exploitation of minor mispric- ing worth the effort. According to this view, the actions of intelligent investment managers are the driving force behind the constant evolution of market prices to fair levels. Rather than ask the qualitative question "Are markets efficient?" we ought instead to ask a more quantitative question: "How efficient are markets?"   The Selection Bias Issue Suppose that you discover an investment scheme that could really make money. You have two choices: either publish your technique in The Wall Street Journal to win fleeting fame, or keep your technique secret and use it to earn mil- lions of dollars. Most investors would choose the latter option, which presents us with a co- nundrum. Only investors who find that an investment scheme cannot generate abnormal returns will be willing to report their findings to the whole world. Hence opponents of the efficient markets view of the world always can use evidence that various techniques do not provide investment rewards as proof that the techniques that do work simply are not being reported to the public. This is a problem in selection bias; the outcomes we are able to ob- serve have been preselected in favor of failed attempts. Therefore, we cannot fairly evalu- ate the true ability of portfolio managers to generate winning stock market strategies. III. Equilibrium In Capital Markets 12. Market Efficiency The McGraw−Hill Companies, 2001