The efficient market hypothesis (EMH) will always have its defenders, because without it you would have to admit that investing isn’t a hard science in the vein of physics or chemistry. This can lead to some odd positions (like people who claim that Warren Buffett is just an incredibly lucky investor), but it also seems to require ignoring clear data that individual investors who manage their own portfolios routinely underperform the markets by a couple percentage points even without accounting for taxes and fees.

 Efficient Market Hypothesis

“Whether from irrationality, time-varying risk-aversion, fear, greed, or other reasons, investors continue to actively trade, chasing fads and shunning past disappointments,” writes Chris Brightman at Research Affiliates. Brightman acknowledges that investors hurt their own returns, but he doesn’t think that this necessarily refutes the EMH.

Testing efficient market hypothesis is really testing your measure of efficiency

“Any test of the EMH is really a joint test of the EMH and the particular asset pricing model used to test for efficiency,” he writes. “The evidence refuting the joint hypothesis of the [capital asset pricing model] and efficient market hypothesis refutes the old CAPM but not the EMH.”

Brightman certainly has a point. It’s easy enough to decide which market we are going to analyze, but hammering down a clear definition of ‘efficient’ isn’t easy, and if your tests show that a market isn’t efficient it’s possible that the problem is that your definition is no good.

Overly broad definitions lose some of their value

While he doesn’t put forward his own definition, Brightman suggests that investors’ preferences should also be taken into account. Buying a lottery ticket, he argues, may just show a strong preference for a ‘positively skewed upside’, not that the person has taken an irrational risk. He is trying to defend efficient market hypothesis by separating it from asset prices and measures of wealth creation, but there is a problem with this approach: it isn’t very useful.

“A field of study is not science unless it produces falsifiable theories,” he writes, but if the notion of efficiency is expanded to include any action an investor might take by appealing to unknown personal preferences, then efficient market hypothesis will always be true in a somewhat trivial way.

If one person argues that Twitter Inc (NYSE:TWTR) is overvalued because it doesn’t have a solid plan to become profitable, and another claims that it is fairly valued because people have a preference for owning famous tech companies, they aren’t disagreeing so much as having separate conversations.