ABSTRACT
The efficient market hypothesis holds that information is equally accessible to all investors and that these investors interpret the information in an unequivocally rational way. Rational investors combine different sources of information by using Bayes' rule: the weights placed on the different pieces of information should be proportional to their respective precision (Daniel and Titman 1999). The classic approach in finance is that only outcomes matter. Consequently, following this approach, asset prices incorporate all the existing information at all moments in time because behavioral biases are independent across individuals and cancel out in the aggregate as they are either averaged out or are corrected for by rational arbitrage.
