Question

Discuss critically, in your own words, whether the burst of the dotcom bubble can be interpreted as evidence against efficient markets?

Answer 1

Yes, the burst of the dotcom bubble can be interpreted as evidence against efficient markets since the Efficient Market Hypothesis reliance on assumptions about information and pricing is fundamentally at odds with the mispricing that drives economic bubbles and we have observed economic bubbles in 2000 as well as in 2008.

Economic bubbles occur when asset prices are greater than their real worth and then fall drastically. The EMH states that asset prices reflect true economic value because information is shared among market participants and rapidly incorporated into the stock price.But not all market participants are able to judge true impact of all information. Also, the emotions of market participants come into effect along with their bias.

Thus, since there was a huge fall in market prices due to dot com bubble bursting, we can use it as an evidence against EMH.