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From Efficient Markets Theory to Behavioral Finance

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Author Info
Robert J. Shiller

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Abstract

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 since 1990 include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money.

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Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 17 (2003)
Issue (Month): 1 (Winter)
Pages: 83-104
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Handle: RePEc:aea:jecper:v:17:y:2003:i:1:p:83-104

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  2. William N. Goetzmann & Massimo Massa, 1999. "Daily Momentum And Contrarian Behavior Of Index Fund Investors," Yale School of Management Working Papers ysm13, Yale School of Management. [Downloadable!]
    Other versions:
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  4. Charles M. Jones & Owen A. Lamont, 2001. "Short Sale Constraints and Stock Returns," NBER Working Papers 8494, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Robert J. Shiller, 1999. "Measuring Bubble Expectations and Investor Confidence," NBER Working Papers 7008, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Robert J. Shiller & Jeeman Jung, 2002. "One Simple Test of Samuelson's Dictum for the Stock Market," Yale School of Management Working Papers ysm315, Yale School of Management. [Downloadable!]
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  7. Campbell, J.Y. & Shiller, R.J., 1988. "Stock Prices, Earnings And Expected Dividends," Papers 334, Princeton, Department of Economics - Econometric Research Program.
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  8. Christopher J. Jarvis, 1999. "The Rise and Fall of the Pyramid Schemes in Albania," IMF Working Papers 99/98, International Monetary Fund.
  9. Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December. [Downloadable!] (restricted)
  10. Pagan, Adrian, 1996. "The econometrics of financial markets," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 15-102, May. [Downloadable!] (restricted)
  11. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-27, May. [Downloadable!] (restricted)
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  12. Ellen R. McGrattan & Edward C. Prescott, 2001. "Taxes, regulations, and asset prices," Working Papers 610, Federal Reserve Bank of Minneapolis.
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  13. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September. [Downloadable!] (restricted)
  14. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September. [Downloadable!] (restricted)
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  16. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-68, September. [Downloadable!] (restricted)
  17. Robert J. Shiller, 2001. "Bubbles, Human Judgment, and Expert Opinion," Cowles Foundation Discussion Papers 1303, Cowles Foundation, Yale University. [Downloadable!]
  18. Terrance Odean, 1998. "Are Investors Reluctant to Realize Their Losses?," Journal of Finance, American Finance Association, vol. 53(5), pages 1775-1798, October. [Downloadable!] (restricted)
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  22. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March. [Downloadable!] (restricted)
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  24. John Y. Campbell & Robert J. Shiller, 1989. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," NBER Working Papers 2100, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  25. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-79, March. [Downloadable!] (restricted)
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  26. Shiller, Robert J., 1982. "Consumption, asset markets and macroeconomic fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17, pages 203-238. [Downloadable!] (restricted)
  27. Figlewski, Stephen & Webb, Gwendolyn P, 1993. " Options, Short Sales, and Market Completeness," Journal of Finance, American Finance Association, vol. 48(2), pages 761-77, June. [Downloadable!] (restricted)
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  30. Zuchel, Heiko & Weber, Martin, 2001. "The Disposition Effect and Momentum," Sonderforschungsbereich 504 Publications 01-26, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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  34. Shiller, Robert J, 1990. "Speculative Prices and Popular Models," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 55-65, Spring. [Downloadable!] (restricted)
  35. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December. [Downloadable!] (restricted)
  36. Shiller, Robert J, 1990. "Market Volatility and Investor Behavior," American Economic Review, American Economic Association, vol. 80(2), pages 58-62, May. [Downloadable!] (restricted)
  37. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May. [Downloadable!] (restricted)
  38. Barberis, Nicholas & Shleifer, Andrei, 2003. "Style investing," Journal of Financial Economics, Elsevier, vol. 68(2), pages 161-199, May. [Downloadable!] (restricted)
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  39. Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July. [Downloadable!] (restricted)
  40. Barsky, Robert B & De Long, J Bradford, 1993. "Why Does the Stock Market Fluctuate?," The Quarterly Journal of Economics, MIT Press, vol. 108(2), pages 291-311, May. [Downloadable!] (restricted)
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  41. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chilosi, Alberto & Damiani, Mirella, 2007. "Stakeholders vs. shareholders in corporate governance," MPRA Paper 2334, University Library of Munich, Germany. [Downloadable!]
  2. R. Andergassen, 2003. "Rational destabilising speculation and the riding of bubbles," Working Papers 475, Dipartimento Scienze Economiche, Università di Bologna. [Downloadable!]
  3. Marian Berneburg, 2006. "Excess Volatility in European Equity Style Indices - New Evidence," IWH Discussion Papers 16-06, Halle Institute for Economic Research. [Downloadable!]
  4. Peter S. Spiro, 2003. "Evidence on inflation expectations from Canadian real return bonds," Macroeconomics 0312004, EconWPA. [Downloadable!]
  5. Alvaro Montenegro, 2006. "La Información Bursátil en Colombia," DOCUMENTOS DE ECONOMÍA 003031, UNIVERSIDAD JAVERIANA - BOGOTÁ. [Downloadable!]
  6. Mihir A. Desai & Dhammika Dharmapala & Winnie Fung, 2005. "Taxation and the Evolution of Aggregate Corporate Ownership Concentration," NBER Working Papers 11469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Schmeling, Maik, 2006. "Institutional and Individual Sentiment: Smart Money and Noise Trader Risk," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-337, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  8. Menkhoff, Lukas & Schmidt, Ulrich, 2005. "The Use of Trading Strategies by Fund Managers: Some First Survey Evidence," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-314, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  9. Lütje, Torben & Menkhoff, Lukas, 2004. "What Drives Home Bias? Evidence from Fund Managers Views," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-296, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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  10. Thomas Schuster, 2003. "Meta-Communication and Market Dynamics. Reflexive Interactions of Financial Markets and the Mass Media," Finance 0307014, EconWPA. [Downloadable!]
  11. Abbigail Chiodo & Massimo Guidolin & Michael T. Owyang & Makoto Shimoji, 2003. "Subjective probabilities: psychological evidence and economic applications," Working Papers 2003-009, Federal Reserve Bank of St. Louis. [Downloadable!]
  12. Robert J. Shiller, 2007. "Understanding Recent Trends in House Prices and Home Ownership," NBER Working Papers 13553, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Andersson, Patric, 2004. "How well do financial experts perform? A review of empirical research on performance of analysts, day-traders, forecasters, fund managers, investors, and stockbrokers," Working Paper Series in Business Administration 2004:9, Stockholm School of Economics. [Downloadable!]
  14. Kevin J. Lansing, 2007. "Rational and near-rational bubbles without drift," Working Paper Series 2007-10, Federal Reserve Bank of San Francisco. [Downloadable!]
  15. Stephan Schulmeister, 2007. "Manic-depressive Price Fluctuations in the Financial Market – How Does the "Invisible Hand" Do it?," WIFO Working Papers 305, WIFO. [Downloadable!]
  16. Brozynski, Torsten & Menkhoff, Lukas & Schmidt, Ulrich, 2003. "The Use of Momentum, Contrarian and Buy-&-Hold Strategies: Survey Evidence from Fund Managers," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-290, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  17. Robert J. Shiller, 2007. "Understanding Recent Trends in House Prices and Home Ownership," Cowles Foundation Discussion Papers 1630, Cowles Foundation, Yale University, revised Oct 2007. [Downloadable!]
  18. Olivier Brandouy & Philippe Mathieu, 2006. "A Broad-Spectrum Computational Approach for Market Efficiency," Computing in Economics and Finance 2006 492, Society for Computational Economics. [Downloadable!]
  19. Beckmann, Daniela & Menkhoff, Lukas & Suto, Megumi, 2007. "Does Culture Influence Asset Managers? Views and Behavior?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-367, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
  20. Kevin J. Lansing, 2005. "Lock-in of extrapolative expectations in an asset pricing model," Working Papers in Applied Economic Theory 2004-06, Federal Reserve Bank of San Francisco. [Downloadable!]
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  21. Kevin J. Lansing, 2007. "Asset price bubbles," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Oct 26. [Downloadable!]
  22. Ernst Juerg Weber, 2007. "The Role of the Real Interest Rate in US Macroeconomic History," Economics Discussion / Working Papers 07-01, The University of Western Australia, Department of Economics. [Downloadable!]
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