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<<Their allocations of capital may be totally at odds with each other depending on their goals. Even if each individual or institution is trying to act rationally, it doesn't mean that the whole is rational.

Actually, with a large population it doesn't require that the individuals be rational. If 50% of the population are so dumb that their actions are incomprehensible and essentially random, and 25% are making decisions which are for other than economic reasons, and 25% are reasonably intelligent and make decisions for economic reasons - that 25% is way more than is needed to keep the allocation of capital relatively rational as the rest are essentially random and, hence, irrelevant.

I, as Jim, like the efficient market theory. I don't believe in it much, however, except to say that it is exceptionally difficult to outguess the market. That is really all the efficient market theory can claim - anyone can see that a single stock can vary by 20% in a single day with no news. How can that be "efficient?" A story which is hardly news comes out about PGE on a Wednesday, by mid-day the third following trade day (Tuesday) the pfd was down 30%, by close the next day half of it was gained back. No, the "efficient market" is a better predictor than any one individual and a tendency towards rational pricing. It is not actually efficient, except by comparison. Emotional Jim and I both flay the market with our (so far and, for me, recent (as I missed the tech bubble both up and down)) unusually superior judgments.

Also, remember even an efficient market can have bad information. This is especially true over longer periods of time.

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