FTFM The efficient market hypothesis forms the basis of most financial activity, relying on the belief that investors act in a rational fashion. This is the case despite the fact that in the short term, clearly investors do not always act rationally, and the valuations of companies implied by prices are often far from fair.
One way in which investors are hit by this temporary blurring of efficiency is in using market capitalisation weighted indices, particularly for passive investing. There is now a form of passive investing, however, that attempts to bypass the biases of cap weighting.
