Harvard Business: Can We Please Stop Saying the Market is Efficient?

By Freek Vermeulen

The economist Jovanovic wrote, about a quarter of a century ago, "efficient firms grow and survive; inefficient firms decline and fail". What he meant is that the market is Darwinian; it will rule out the least efficient firms, with habits and practices that make them perform comparatively badly, and it will make sure efficient firms prosper, so that only good business practices prevail.

Yeah right.

When you look around you, in the world of business, one sometimes can't help wonder where Darwin went wrong... How come we see so many firms that drive us up the wall, how come we see silly business practices persist (excessive risk taking, dubious governance mechanisms, corporate sexism, grey suits and ties to name an eclectic few), and how come so many - sometimes well-educated and intelligent - people continue to have an almost unshakable belief that the market really is efficient, and that it will make the best firms prevail if you just give it time? (more)