Efficient Market Hypothesis?

News that Liberal party frontbencher Peter Dutton bought BHP shares 2 days after the announcement of the Resource Rental Tax has had pundits a-twittering. Joshua Gans takes a wry look at the scenario

One view is that he doesn’t believe the tax will harm BHP and, indeed, that the market has over-reacted to it. That gives us to potential hypocrisy line — you can’t attack the tax for harming mining companies at the same time as buying stock — but also a lack of belief in markets line — the markets don’t know how to evaluate these things as well as Dutton. Both beliefs are revealed by this story.

The alternative is that Dutton knows that the tax won’t actually be put in place. This requires a ‘being ahead of the market’ belief on the part of Dutton again, but this time he may actually know more than the market on this. Specifically, he may have information that others do not possess that the tax is likely to be blocked and so BHP shares are under-valued. Of course, this might just be a guess on his part in which case he doesn’t think the markets are working properly again.

So which is it? Markets don’t work properly or extra information that the market does not have, or both? Or, maybe these investments are not made with very much thought.