One of the most important hypotheses in economics is referred to as the efficient markets hypothesis (EMH). This hypothesis is also one of the most maligned by the popular media.

Why would economists defend a position that is considered ridiculous by non-economists? The answer should provide insight and direction for entrepreneurs who are evaluating a potential venture.

In its strongest form, EMH says that prices reflect all available information. A direct result of this hypothesis is that investors cannot beat the market consistently over an extended period of time. They may beat the market occasionally for a short period of time. But over the long haul, their luck will run out.

The way I illustrate the concept to my students is to tell a joke. An economics professor and a student are walking down the street. They see a $100 bill on the sidewalk. The student stops to pick it up. The professor says, "Don't bother. If it were really there, someone would have already picked it up."

Media pundits assert that the EMH is ridiculous because from what they can see, investors appear to beat the market all the time.

First of all, think carefully what this assertion means. The pundits claim that there are investors who can consistently find stocks that are worth, for example, $50 but are selling for $40. But they forget that there are literally millions of investors. Why haven't they already discovered the under pricing, started to buy the stock and driven the price to $50?

Those investors include tens of thousands of mutual fund, pension fund, hedge fund and private equity managers who have hundreds of support staff, sophisticated information systems, massive computer and technical support and substantial amounts of money and time to investigate every company. There are only about 10,000 companies with traded stock. Why haven't these sophisticated investors discovered and corrected the under pricing?

Still, there are those who appear on TV or radio to talk about how they have figured out how to beat the market, and they appear to have facts to back their claims. Why are they able to do that?

Statistics suggest that about 5 percent of investors will beat the market over a five-year period. Some of these people will appear in the media as "experts" simply because they were, quite frankly, lucky. Few of them will ever have that kind of success in the future. The incredibly lucky one-tenth of 1 percent who can beat the market over a 10-year period are the gurus you see constantly in the news.

I illustrate the "attribution effect" to my students by asking them to estimate the ratio of murders to suicides in the United States each year. I ask, by show of hands, how many believe the ratio is more than 10 murders per suicide. A few hands come up. More than five? More hands. More than two? Most hands are raised.

Then I inform them that there are actually more U.S. suicides than murders every year. But murders are in the news every night, and you rarely hear about suicides. So you attribute higher probability to murders than you should.

The same thing happens with beating the market. Only the winners appear on TV and radio. The overwhelming majority who underperform never appear. As a result, you believe it is easier to beat the market than it really is. Entrepreneurs hope for a successful business. The place to look is not where there is a lot of information available and lots of investors looking (like the stock market). The best hope is to find something that is hidden where no one else is looking. Often that means something that will be hard to do and may be discouraging at first. That's why no one is looking there.

The investors described above simply want to buy and sell pieces of paper. At least entrepreneurs are looking in the right place, even though the time and effort of starting your business discourages the overwhelming majority of investors.

Still, $100 bills don't stay on the street for long.