Freshwater, Saltwater, and Deepwater: Efficient Market Hypothesis versus Behavioral Finance

Abstract

The efficient market hypothesis (EMH) and behavioral finance (BF) form the blame-hope axis of the ongoing soul-searching exercise in economics, which frequently refers to the ‘Chicago School’ and the ideological division between ‘freshwater’ and ‘saltwater’ universities. Citation analysis for 1965-2010 shows that these simple geographical anecdotes do not apply, as saltwater economists heavily cited the seminal EMH papers from the beginning, and vice versa. BF lags behind EMH in terms of the quantity, dynamics, scope, and international reach of citations. BF is far from stealing a march on the EMH, and the latter is still used as the benchmark.

Keywords: efficient market hypothesis, behavioral finance, Chicago School, Eugene Fama

JEL Classification: A14, B26, G02, G14