Economist's View: "The Invincible Markets Hypothesis": "There are two versions of the efficient markets hypothesis, a strong version and a weak version. According to the strong version prices accurately reflect the underlying intrinsic value of financial assets, but the weak version only requires that prices be unpredictable, they don't have to accurately reflect fundamental values.
The strong version is, well, too strong and it seems clear that this condition is not satisfied in asset markets, at least not on a continuous basis. The weak version, however, does have support (though even here there is not universal agreement). The distinction between the strong and weak versions, and the assertion that the weak version holds even if the strong version does not, is often used as a defense of the efficient markets hypothesis.
Rajiv Sethi asks a good question. If the strong version of the efficient markets hypothesis does not hold, in what sense does satisfying the weaker form constitute 'efficiency'? He argues that 'it makes little sense to say that markets are efficient, even if they are essentially unpredictable in the short run. In light of this, he proposes a new name for the weak form of the hypothesis:"
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