Behavioral Finance or Efficient Market Hypothesis

Behavioral Finance and Efficient Market Hypothesis have different kind of perceptions of the financial literature. While the efficient market hypothesis supports people are rational investors who are important part of financial market, behavioral finance which is alternative model accepts people are normal and they can be irrational. When efficient market hypothesis is considered, the assumption is that the price of stock market will reach equilibrium since prices are informationally efficient. However, behavioral finance claim that investors tend to have some psychological and emotional biases which lead to irrationality. Both of new and old concepts try to find solution for ecomomic and financial problems. Therefore, assumptions and research for these two different models play an essential role to understand and prevent financial crises. Otherwise, it will be hard to solve the underlying problem of economic and financial crises. That is why, Behavioral Finance and Efficient Market Hypothesis which play an essential role in every branch of finance will be compared.