The proposition that publicly available information is incorporated into financial asset prices so that, after adjusting for risk and transaction costs, no trading strategy based solely on that information can reliably produce persistent abnormal (risk‑adjusted) returns.

Principle

If available information is reflected in prices, the expected excess return from trading on that information is zero once risks and costs are accounted for; observed deviations create incentives for arbitrage that, under the hypothesis' assumptions, eliminate those deviations.

Demonstration

Situation: A firm announces earnings above expectations. Recognition: Market participants receive and interpret the announcement. Action: Buyers place orders and sellers adjust quotes. Consequence: The asset price moves quickly to incorporate the news, leaving no predictable, risk‑adjusted profit from trading only on that public announcement after transaction costs.

Misapplication

Interpreting EMH as claiming prices always equal fundamental value or that prices are perfect forecasts; the semantic error is conflating informational efficiency (price incorporates information) with correctness of valuation or absence of private information and frictions.

Consequence

Treating markets as informationally efficient shifts emphasis toward risk‑based pricing and passive strategies, affects asset‑pricing models and regulatory focus on disclosure; it does not imply individual prices are never mispriced or that active strategies cannot occasionally outperform by chance or private information.

Reversal

When assumptions fail — e.g., significant transaction costs, limits to arbitrage, asymmetric information, thin markets, or behavioral biases — prices may systematically deviate from the public‑information benchmark and profitable strategies can persist for some time.

Boundary

Clearly within: liquid securities with rapid public disclosure and many arbitrageurs. Boundary case: less liquid or thinly traded assets where some public information is incorporated but delays exist. Clearly outside: situations of unknown probabilities, private inside information, or markets dominated by severe trading frictions.

Semantic Tension

Competes with behavioral finance claims that systematic investor biases and frictions produce predictable mispricings; the tension is between a normative benchmark of price informativeness and empirical descriptions of market imperfections.

Synthesis

EMH is best read as a probabilistic, conditional statement about the expected absence of persistently exploitable, public‑information‑based profits under specified assumptions, not as an absolute claim that prices are always ‘correct.’