From Efficient Market Theory to Behavioral Finance

Abstract:     
The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a blossoming of research on behavioral finance. Some important developments in the 1990s and recently include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money.

Keywords: Speculative Markets, Rational Expectations, Psychology, Anomalies, Excess Volatility, Feedback, Smart Money, Limits to Arbitrage, Short Sales

JEL Classifications: G14

Working Paper Series