In our first year MBA class, we were taught the Efficient Market hypothesis. It basically implies that it is impossible to beat the market on a risk adjusted basis. If you want to beat the markets, you have to take more risks.

Now, this hypothesis relies on a class of people/agents who can be loosely identified as "entrepreneurs" - who identify any opportunity to make higher returns, make money out of it and correct the prices. Hence, markets again become efficient.

The thing to note here is that, this class of people which I have called above as "entrepreneurs" are those agents who operate on the margins and always looking to push the boundaries. e.g. If there is a new cheaper way to drill oil, entrepreneurs will exploit this technology by forming ventures which exploit this - and bring the prices down. The market thus gets corrected. If there is a new way to deliver goods cheaper by drones, there will be entrepreneurs who will start ventures to provide this service - and hence will make delivering goods cheaper. This will reduce the price of delivery and hence the logistics market will get corrected. You get the drill...

But, being in the space of creating ventures and constantly thinking about it for few years now, I think that not enough thought has been given to how these "entrepreneurs" are created. There are no single, well defined process by which entrepreneurs are created. Some accidentally discover an opportunity, some tinkered for long years to reach there. There is lot of luck involved. For example, Jeff Bezos came to know about the potential power of the Internet - by working for DE Shaw - which was a hedge fund trying to exploit the emergence of computers and the Internet. Ray Krock, who took over Mc Donald from its founder - and scaled it across the world. There is not set pattern for it.

Since the process by which entrepreneurs come to be is so random, how can something like the Efficient Market hypothesis - which relies on "entrepreneurs" exploiting every possible opportunity - be true. There are many areas where very few entrepreneurs enter - just because of the nature of that market - and these markets stand uncorrected for a long period of time. Markets which involves hardware are uncorrected for a long time - because very few entreprenuers go there. Areas which are loved by VCs get lots more attention - and hence are more efficient.

Of course, if by some random chance, an entrepreneur goes to an unattended area - and achieves success - then a lot of money flows into it - and the market gets corrected. But, till that entrepreneur stumbled upon that area - it was uncorrected for a long time. A case which comes to mind, is the area of RPA (Robotic process automation) which was unattended for a long time - till UiPath somehow stumbled into it - after barely surviving for 8-9 years. Of course, after UiPath - lots of money flew into this market and the market is overheated now.

So, the very mechanism by which markets get corrected is so flaky - so based on luck, that it always remains uncorrected for long periods of time - before it gets corrected.

The invisible hand of the market works through the toil of entrepreneurs. But the creation of entrepreneurs is unpredictable, and thus the invisible hand also plays to its own tune.

Efficient market hypothesis is just taught to students, to make them feel that the world works through well defined rules. While in reality, there is so much depth and complexity in the world, that simple rules like EMH can't possibly ever explain it.