In an efficient market, it is believed by some individuals that the actions of traders who constantly buy and sell on any perceived market mispricings will in effect cause market prices to correctly reflect asset values. A person who believes that the actions of these traders will not result in correctly valued prices is most apt to believe in which one of the following?
A) Gambler's fallacy.
B) Limits to arbitrage.
C) Availability bias.
D) False consensus.
E) Clustering illusion.

Question

Quizplus · Accepted Answer

The concept of "limits to arbitrage" suggests that there are practical and theoretical limits to exploiting arbitrage opportunities, which can prevent prices from fully correcting to reflect true asset values. This belief aligns with the view that traders' actions may not always lead to correctly valued prices, due to obstacles like transaction costs, restrictions on short selling, and risk.

In an Efficient Market, It Is Believed by Some Individuals