Behavioral Finance
In this page, we will take a look at the "EMH", efficient market hypothesis (vs Behavioural Finance).
Other links to related GloboTrends pages include:
"BEHAVIOURAL Economics"
A strand of sceptical thought, behavioural economics, has been booming.
"Behavioural economists were among the first to sound the alarm about trouble in the markets. Notably, Robert Shiller of Yale gave an early warning that America’s housing market was dangerously overvalued. This was his second prescient call. In the 1990s his concerns about the bubbliness of the stockmarket had prompted Alan Greenspan, then chairman of the Federal Reserve, to wonder if the heady share prices of the day were the result of investors’ “irrational exuberance”. The title of Mr Shiller’s latest book, “Animal Spirits” (written with George Akerlof, of the University of California, Berkeley), is taken from John Maynard Keynes’s description of the quirky psychological forces shaping markets. It argues that macroeconomics, too, should draw lessons from psychology.
“In some ways, we behavioural economists have won by default, because we have been less arrogant,” says Richard Thaler of the University of Chicago, one of the pioneers of behavioural finance. read more from The Economist.com
Read more from the Economist: The Social Science Research Network has a paper by Andrew Lo on the efficient markets hypothesis. Myron Scholes, Joseph Stiglitz, Andrei Shleifer, Robert Shiller and Richard Thaler discuss economics.
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McKinsey on "Behavioral Finance":
Are stock markets rational?
Behavioral finance offers valuable insights—particularly the idea that rational investors can’t always correct for mispricing by irrational ones. But as a team of McKinsey authors argued in 2005, in “Do fundamentals—or emotions—drive the stock market?”, the critical question for executives is how often these deviations arise and whether they are so common and important that they should influence the financial decisions of companies. In fact, the authors claim, significant deviations from intrinsic value are unusual; despite transitory booms and busts, markets generally soon revert to share prices reflecting economic fundamentals... read more...."Do fundamentals—or emotions—drive the stock market? [includes audio] March 2005
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Economic View
An Echo Chamber of Boom and Bust
By ROBERT J. SHILLER
Published: August 29, 2009
THE global signs of a recovery in economic confidence seem puzzling.
It is a large and diverse world, after all, so why should confidence have rebounded so quickly in so many places? Government stimulus and bailout packages have generally not been big enough to have such a profound effect.
What happened? Economic analysts often turn to indicators like employment, housing starts or retail sales as causes of a recovery, when in fact they are merely symptoms. For a fuller explanation, look beyond the traditional economic links and think of the world economy as driven by social epidemics, contagion of ideas and huge feedback loops that gradually change world views. These social epidemics can travel as swiftly as swine flu: both spread from person to person and can reach every corner of the world in short order.
As George Akerlof and I argue in our book, “Animal Spirits,” the business cycle is tied to feedback loops involving speculative price movements and other economic activity — and to the talk that these movements incite. A downward movement in stock prices, for example, generates chatter and media response, and reminds people of longstanding pessimistic stories and theories. These stories, newly prominent in their minds, incline them toward gloomy intuitive assessments. As a result, the downward spiral can continue: declining prices cause the stories to spread, causing still more price declines and further reinforcement of the stories.
read more from NY Times
More from WikiPedia:
Behavioral economics and behavioral finance are closely related fields which apply scientific research on human and social cognitive and emotional biases to better understand economic decisions and how they affect market prices, returns and the allocation of resources. The fields are primarily concerned with the rationality, or lack thereof, of economic agents. Behavioral models typically integrate insights from psychology with neo-classical economic theory. Behavioral Finance has become the theoretical basis for technical analysis.
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