The driving force toward market efficiency is simply competition and the profit motive. Investors constantly try to identify superior performing investments. Using the most advanced information processing tools available, investors and security analysts constantly appraise stock values, buying those that look even slightly undervalued and selling those that look even slightly overvalued. This constant appraisal and buying and selling activity, and the research that backs it all up, act to ensure that prices never differ much from their efficient market price.
To give you an idea of how strong the incentive is to identify superior investments, consider a large mutual fund such as the Fidelity Magellan Fund. This is the largest equity fund in the United States, with over $70 billion under management (as of mid-1999). Suppose Fidelity was able through its research to improve the performance of this fund by 20 basis points (recall that a basis point is 1 percent of 1 percent, i.e., .0001) for one year only. How much would this one-time 20-basis point improvement be worth?
The answer is .002 × $70 billion, or $140 million. Thus Fidelity would be willing to spend up to $140 million to boost the performance of this one fund by as little as 1/5 of 1 percent for a single year only. As this example shows, even relatively small performance enhancements are worth tremendous amounts of money, and thereby create the incentive to unearth relevant information and use it.
Because of this incentive, the fundamental characteristic of an efficient market is that prices are correct in the sense that they fully reflect relevant information. If and when new information comes to light, prices may change, and they may change by a lot. It just depends on the new information. However, in an efficient market, right here, right now, price is a consensus opinion of value, where that consensus is based on the information and intellect of hundreds of thousands, or even millions, of investors around the world.