From Efficient Market Theory to Behavioural Finance

Year Published 2002
Business unit: Special Projects
Resource type: Discussion papers
File type: PDF
Theme(s): Economic Development, Finance, Policy analysis


Robert J. Shiller published this Cowles Foundation Discussion Paper No. 1385 in 2002. 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.

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