An interesting piece in this morning’s FT by Gillian Tett.
The Chartered Financial Analyst Institute, which for many years had taught the so-called “efficient markets†hypothesis to thousands of students, asked its members for the first time if they trusted in “market efficiency†– and discovered that more than two-thirds of respondents no longer believed that market prices reflected all available information.
77 per cent of the CFA group also “strongly†or “very strongly†disagreed that investors in aggregate behaved “rationally†– in apparent defiance of the notion of the “wisdom of crowds†that has driven much investment theory in recent times.
And what is the new creed? Behavioural finance – the notion that markets are driven by emotions, such as fear.
Crisis of faith for high priests of rational markets
By Gillian Tett
http://www.ft.com/cms/s/0/4a51fc5c-59cc-11de-b687-00144feabdc0.html
Maybe not dead, just very sick. Interestingly, the article cites a growing interest in behavioural finance to help explain market behaviour. That’s only part of the solution. The rest of the “answer” will be found in improving information completeness in markets. Information is the basis of *all* decision-making.