Why the Grossman-Stiglitz Paradox suggests that stock markets cannot be perfectly efficient

This video explores the Grossman-Stiglitz Paradox, a concept that challenges the idea of market efficiency. It is worth watching for anyone interested in the fundamental mechanics of how stock markets operate and why they may not function as perfectly as some theories suggest.

The Grossman-Stiglitz Paradox posits that stock markets cannot be efficient. The core of the argument is that if markets were perfectly efficient, there would be no incentive for investors to gather information, as they would not be compensated for the costs of doing so. Therefore, some degree of inefficiency must exist to reward those who perform the work of price discovery.

This paradox serves as a critical counterpoint to the Efficient Market Hypothesis, suggesting that the very existence of active market participants implies that prices cannot fully reflect all available information at all times.

Source: The Grossman Stiglitz Paradox - Collaboration with Ben Felix