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Dr. Vinay Nair This article was authored by Dr. Vinay Nair, Founder and CEO of Ada Investments, an equities-based investment platform with offices in New York, Mumbai and Rio de Janeiro. Prior to becoming an investment manager, Dr. Nair was an Assistant Professor of Finance at The Wharton School, where he is now a visiting professor.

I was recently reading Justin Fox’s interview with John Campbell and was reminded of Paul Samuelson’s hypothesis on efficiency.

"Modern markets show considerable micro efficiency (for the reason that the minority who spot aberrations from micro efficiency can make money from those occurrences and, in doing so, they tend to wipe out any persistent inefficiencies). In no contradiction to the previous sentence, I had hypothesized considerable macro inefficiency, in the sense of long waves in the time series of aggregate indexes of security prices below and above various definitions of fundamental values" (Shiller, 2001).

What he is saying here is that relative mispricing between different stocks will be corrected fairly quickly. But the overall level of market prices can be puzzlingly low or high for long periods of time. In other words, micro efficiency can co-exist with macro inefficiency. ......................

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