4- derivative securities such as options and collateralized mortgage obligations,for which arbitrage strategies entail complex dynamic trading.The celebrated Black-Scholes option pricing formula spawned a large derivative asset-pricing industry,within which the lines between academia and practice have blurred.No-arbitrage conditions pin down relative prices (e.g.,how the price of a call option on IBM shares should be linked to the share price). Whether the price level of the share itself is correct is more difficult to establish,since a model of equilibrium pricing must be invoked.Black(1986)-a pioneer of the efficient markets model-observes that the empirical tests to date may not reject the market efficiency hypothesis even if the price levels are off by a factor of 100%. Of course,as Fama(1990)notes,"The market efficiency hypothesis is an extreme null hypothesis,a point on a continuum,and so almost surely false.The interesting task is...to measure the extent to which behavior of returns departs from its predictions."After nearly four decades of intensive empirical investigation of investment market prices,the gross evidence generally supports the hypothesis-see recent surveys in Merton(1987b)and Fama (1990).The evidence from firm behavior and the market for corporate control is more controversial:witness the raging debates about whether junk bonds or hostile acquisitions promote efficiency,and whether associated transaction prices are ex-ante appropriate.We know that some cities fail to discount for time in choosing capital projects.And there are myriad stories of firms making uncritical and incorrect use of weighted average cost-of-capital figures in their capital budgeting. The power of the market efficiency principle provoked ingenious efforts to explain anomalies.These efforts yielded insights in agency theory,asymmetric information equilibria, signaling,and game theory.Clearly,the field gained by maintaining an intuitively wise organizing principle as a null hypothesis.Compare the similar success of the genetic-fitness paradigm for evolutionary modeling,which spawned a vast literature on evolutionary psychology (with ripple effects in philosophy and sociology). After the early battles in academia,the efficiency benchmark has become a valuable null hypothesis for organizing lessons and studies about financial behavior.Models that purport to violate this principle have to be explicitly articulated and subjected to rigorous testing. Unfortunately,many studies placed such a large prior probability on the market efficiency hypothesis that falsifying findings were almost precluded.For example,the academic consensus about exchange rates is that they are uncorrelated and unpredictable.Nevertheless sophisticated speculators and technical advisors claim to consistently observe and take Te Dawkins (9)onhe genetic fitess principle which shres overoes with theriosfishess principle in neoclassical economies and methodological individualism in sociology.Dupre(1987)has edited a more recent collection of related essays