Contrasting the Art of Economic Science with Pseudo-Economic Nonsense: The Distinction Between Reasonable Assumptions and Ridiculous Assumptions
Penn State Law
May 23, 2008
Penn State Legal Studies Research Paper No. 03-2008
In this paper I explain that law professors who claim to have proven that the stock market cannot be efficient have based their case on economic models contain hidden assumptions which are nonsense. Specifically, the assumption that investors have no wealth constraint and can borrow unlimited amounts of capital is nonsense. I further explain that the frequently touted claim that many investors are irrational is not relevant to the debate about market efficiency because when real world characteristics of financial markets are imposed - markets clear, budget constraints are satisfied, and investors face credit limits - markets will be efficient regardless of the mental capacity of investors.
Number of Pages in PDF File: 69working papers series
Date posted: May 27, 2008
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