Behavioural Finance and the Efficiency of Capital Markets Essay

Behavioural Finance and the Efficiency of Capital Markets - Essay Example exclusively the literature on market place efficiency defines an efficient market as one where prices reflect all available study and sellers suffernot earn windfall kale in a sustained manner (Fama, 1970). Large profits screw be earned lone(prenominal) by having inside information that is not publicly known and trading based on such information, or through misinformation both are illegal.In an efficient market, assuming all companies disclose information to investors, only those who enter the market first may earn above average returns. Just like any other market, the one who arrives first can buy at a lower price and then, as demand goes up, sell at a higher price.This logic that consistently beating the market is not possible led to the creation of index funds that mimic the markets performance. Nevertheless, small investors unaware of these academic and empirical discussions lead to try to beat the m arket, only to incur expenses on fees and commissions.Behavioural finance proponents think that market-beating strategies exist and that a careful analysis of historical price trends and fiscal reports can pay pip (Shiller, 1990). They point to stock market anomalies and other forms of market inefficiencies that allow investors to reap above average returns.He claims that conclu... Nevertheless, small investors unaware of these academic and empirical discussions continue to try to beat the market, only to incur expenses on fees and commissions.Behavioural finance proponents think that market-beating strategies exist and that a careful analysis of historical price trends and financial reports can pay off (Shiller, 1990). They point to stock market anomalies and other forms of market inefficiencies that allow investors to reap above average returns.So going fend for to our question are markets efficient Fama (1998) thinks it is and that it continues to be so as proven by empirical s tudies (Fama and French 1992, 1993, 1996 and Malkiel, 1995). He claims that conclusions based on market anomalies discovered by behavioural finance are due to poorly done statistical work (1998, pp. 292-294) and amateurish techniques (1998, p. 296). He cited (1998, pp. 288-290) above average returns as the expiration of chance, that behavioural finance models are loaded with judgmental biases making it predictably easy to justify any hypothesis proposed, and that the efficient market hypothesis can explain all forms of market behaviour to date.Behavioural finance supporters Barberis, Shleifer and Vishny (1998) claim that an ongoing battle between rational and irrational traders exists in the market, with the irrational ones dominating. The self-opinionated errors that irrational investors make when they use public information to form expectations of future cash flows overwhelm the efforts of rational traders to undo the formers market dislocating effects. Daniel, Hirshleifer, and Subrahmanyam (1998) state that irrational traders overconfidence in interpreting