Explain the various challenges to the Efficient Market Theory.

Various challenges to the Efficient Market Theory are as follows: (i) Information inadequacy – Information is neither freely available nor rapidly transmitted to all participants in the stock market. There is a calculated attempt by many companies to circulate misinformation. (ii) Limited information processing capabilities – Human information processing capabilities are sharply limited. According to Herbert Simon every human organism lives in an environment which generates millions of new bits of information every second but the bottlenecks of the perceptual apparatus does not admit more than thousand bits per seconds and possibly much less. David Dreman maintained that under conditions of anxiety and uncertainty, with a vast interacting information grid, the market can become a giant. (iii) Irrational Behaviour – It is generally believed that investors' rationality will ensure a close correspondence between market prices and intrinsic values. But in practice this is not true. J. M. Keynes argued that all sorts of consideration enter into the market valuation which is in no way relevant to the prospective yield. This was confirmed by L. C. Gupta who found that the market evaluation processes work haphazardly almost like a blind man firing a gun. The market seems to function largely on hit or miss tactics rather than on the basis of informed beliefs about the long term prospects of individual enterprises. (iv) Monopolistic Influence – A market is regarded as highly competitive. No single buyer or seller is supposed to have undue influence over prices. In practice, powerful institutions and big operators wield great influence over the market. The monopolistic power enjoyed by them diminishes the competitiveness of the market.