Grossman–Stiglitz Paradox
Market Microstructure glossary · Adverse Selection & Information Asymmetry
Definition
The observation that perfectly efficient prices would eliminate the incentive to acquire information, which is necessary for prices to become efficient.
Grossman–Stiglitz Paradox in plain English
This is a brain-teaser about why anyone bothers to do research. Digging up information (reading reports, crunching numbers) costs time and money, and people only do it if they can profit by trading on what they learn. But if prices already reflected ALL information perfectly, there'd be nothing left to profit from — so no one would pay to research, and then prices couldn't be accurate in the first place. It's like a class where the answer key is posted for free: nobody studies, so the 'answers' stop being trustworthy. The resolution is that real markets are just inefficient ENOUGH to reward the researchers who keep prices roughly right.
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