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Definition
Fair value, also called fair price, is a concept used in finance and economics.
It is considered by supporters to be a rational and unbiased estimate of the
potential market price of a good, a service, a financial asset, etc.,
taking into account such elements as, among others:
- its production / distribution costs,
- its usefulness (for goods ans services)
- its financial return (for assets), or what economists call utility (return / risk
balance)
- its rarity, among others.
Fair value vs market price
There are two schools of thought about the relation between the market price and the fair value, at least as concerns
financial assets:
- The efficient market hypothesis),
asserting that, in a well organized and well informed market, the market price is equal or close to the fair value, as investors
react immediately and adequately to any outside information
- Behavioral finance that states, on the contrary, that the
market price diverges quite often and largely from the fair value, because of various collective cognitive or emotional biases
affecting investors.
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