From the Efficient Market Hypothesis to Behavioral Finance: The Evolution of Finance Theory

Meltem Gürünlü
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Meltem Gürünlü: Maltepe University

Journal of Finance Letters (Maliye ve Finans Yazıları), 2011, vol. 26, issue 92, 31-50

Abstract: This study aims to analyze how finance theory evolved over time from Efficient Market Hypothesis (EMH) to Behavioral Finance and put forward the results for investors, corporate finance decision makers, market regulators and policy makers by examing pros and cons of EMH which had gained both theoretical and empirical sucess since it’s first appearance in 1960’s till the beginning of 1980’s. For this aim, a detailed literature survey is conducted. It is found that the factors affecting efficient markets such as arbitrage and investors rationality are limited and weaker than what the EMH theorists claimed. As a result, we can not claim that Behavioral Finance has grown up to be a coherent theory and completely replaced traditional finance theory. But, the analytical tools and testable models provided by EMH are enriched by various applications of Behavioral Finance which takes into account factors such as investors pshycology and human behaviors and EMH continues to serve as a benchmark to analyze the differences between what should be in theory and what happened in reality.

Keywords: Efficient Markets Hypothesis (EMH); Behavioral Finance; Security Prices (search for similar items in EconPapers)
JEL-codes: G14 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:acc:malfin:v:26:y:2011:i:92:p:31-50

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