Markets thrive on contradictions. Every buyer needs a seller—and each thinks they are making a good trade despite the likelihood that the other is at least as well-informed as they are. Investors know that markets are the best prediction engines out there, and try to beat them anyway. Perhaps the most useful piece of financial theory, the “no-arbitrage” principle, says that portfolios with the same pay-offs must have the same price. Yet if this were always true, the arbitrageurs who profit from enforcing it would go out of business and there would be no one left to do so.
Source:
www.economist.com
