Efficient-market hypothesis
Behavioral psychology

Behavioral psychology approaches to stock market trading are among some of the alternatives to EMH (investment strategies such as momentum trading seek to exploit exactly such inefficiencies). However, Nobel Laureate co-founder of the programme Daniel Kahneman —announced his skepticism of investors beating the market: "They're just not going to do it. It's just not going to happen." Indeed, defenders of EMH maintain that behavioral finance strengthens the case for EMH in that it highlights biases in individuals and committees and not competitive markets. For example, one prominent finding in behavioral finance is that individuals employ hyperbolic discounting. It is demonstrably true that bonds, mortgages, annuities and other similar obligations subject to competitive market forces do not. Any manifestation of hyperbolic discounting in the pricing of these obligations would invite arbitrage thereby quickly eliminating any vestige of individual biases. Similarly, diversification, derivative securities and other hedging strategies assuage if not eliminate potential mispricings from the severe risk-intolerance (loss aversion) of individuals underscored by behavioral finance. On the other hand, economists, behavioral psychologists and mutual fund managers are drawn from the human population and are therefore subject to the biases that behavioralists showcase. By contrast, the price signals in markets are far less subject to individual biases highlighted by the Behavioral Finance programme. Richard Thaler has started a fund based on his research on cognitive biases. In a 2008 report he identified complexity and herd behavior as central to the 2008 financial crisis.
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