Roll's Critique is a significant argument in the field of economic theory, particularly in the context of the efficiency of markets and the assumptions underlying the theory of rational expectations. It primarily challenges the notion that markets always lead to optimal outcomes by emphasizing the importance of information asymmetries and the role of uncertainty in decision-making. According to Roll, the assumption that all market participants have access to the same information is unrealistic, which can lead to inefficiencies in market outcomes.
Furthermore, Roll's Critique highlights that the traditional models often overlook the impact of transaction costs and behavioral factors, which can significantly distort the market's functionality. By illustrating these factors, Roll suggests that relying solely on theoretical models without considering real-world complexities can be misleading, thereby calling for a more nuanced understanding of market dynamics.
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