Competing Theories of Financial Anomalies
32 Pages Posted: 25 Jan 2000
Date Written: April 2001
We compare two competing theories of financial anomalies: (1) behavioral theories built on investor irrationality; and (2) rational structural uncertainty theories built on incomplete information about the structure of the economic environment. We find that although the theories relax opposite assumptions of the rational expectations ideal, their mathematical and predictive similarities make them difficult to distinguish. Interestingly, even if irrationality generates financial anomalies, their disappearance still may hinge on rational learning ? that is, on the ability of rational arbitrageurs and their investors to reject competing rational explanations for observed price patterns.
JEL Classification: G12, G14, G18
Suggested Citation: Suggested Citation