Advances in Economics, Management and Political Sciences

- The Open Access Proceedings Series for Conferences


Proceedings of the 7th International Conference on Economic Management and Green Development

Series Vol. 31 , 10 November 2023


Open Access | Article

The Dynamic Interplay of Market Forces and Human Behavior: A Critical Review of Efficient Market Hypothesis and Behavioral Finance

Gaoyuan Gu * 1
1 New York University Shanghai

* Author to whom correspondence should be addressed.

Advances in Economics, Management and Political Sciences, Vol. 31, 54-59
Published 10 November 2023. © 2023 The Author(s). Published by EWA Publishing
This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Citation Gaoyuan Gu. The Dynamic Interplay of Market Forces and Human Behavior: A Critical Review of Efficient Market Hypothesis and Behavioral Finance. AEMPS (2023) Vol. 31: 54-59. DOI: 10.54254/2754-1169/31/20231498.

Abstract

This literature review offers a comprehensive examination of the Efficient Market Hypothesis (EMH) and Behavioral Finance, as well as their respective implementations in the realm of stock markets. The EMH asserts that financial markets are efficient and that prices accurately reflect all available information. On the other hand, Behavioral Finance recognizes that individuals often make irrational investment decisions based on cognitive biases and emotions. This article explores the interplay between these theories in different applications, including information and communication technology, the stock market’s efficiency and anomalies, and the Adaptive Markets Hypothesis (AMH). This review suggests that while EMH provides a theoretical framework for understanding the efficiency of financial markets, Behavioral Finance offers valuable perspectives on the constraints of logical decision-making and the impact of human behavior on market results. The Adaptive Market Hypothesis provides a third choice balancing the EMH and Behavior Finance. Overall, the article the paper presents a thorough examination of the EMH, Behavioral Finance, and the AMH, along with their respective implementations in stock markets. It highlights the importance of understanding the interplay between these theories to gain a better understanding of financial markets and make informed investment decisions.

Keywords

EMH, behavioral finance, stock market, AMH

References

1. Bachelier, L.: Théorie de la spéculation. Annales Scientifiques de l’Ecole Normale Superieure. Quatrieme Serie, 17, 21–86 (1900).

2. Fama, E. F.: Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383 (1970).

3. Daniel, K., Hirshleifer, D., & Subrahmanyam, A.: Investor Psychology and Security Market Under- and Overreactions. The Journal of Finance, 53(6), 1839–1885 (1998).

4. Fama, E. F.: Efficient Capital Markets: II. The Journal of Finance, 46(5), 1575–1617 (1991).

5. Sharpe, W. F.: Efficient Capital Markets: A Review of Theory and Empirical Work: Discussion. The Journal of Finance, 25(2), 418 (1970).

6. Jensen, M. C., Black, F., & Scholes, M. S.: The Capital Asset Pricing Model: Some Empirical Tests. SSRN Electronic Journal (1972).

7. Fama, E. F., & French, K. R.: The Capital Asset Pricing Model: Theory and Evidence. The Journal of Economic Perspectives: A Journal of the American Economic Association, 18(3), 25–46 (2004).

8. Jensen, M. C.: Some anomalous evidence regarding market efficiency. Journal of Financial Economics, 6(2–3), 95–101 (1978).

9. Grossman, S. J.: On the Impossibility of Informationally Efficient Markets. SSRN Electronic Journal (1980).

10. Stout, L. A.: How Efficient Markets Undervalue Stocks: CAPM and Ecmh Under Conditions of Uncertainty and Disagreement. SSRN Electronic Journal (1997).

11. Fama, E. F.: Market efficiency, long-term returns, and behavioral finance. Journal of Financial Economics, 49(3), 283–306 (1998).

12. Keiber, K. L.: Reconsidering the impossibility of informationally efficient markets. Applied Financial Economics, 17(14), 1113–1122 (2007).

13. Shleifer, A., & Vishny, R. W.: The limits of arbitrage. The Journal of Finance, 52(1), 35–55 (1997).

14. Malkiel, B. G.: Reflections on the efficient market hypothesis: 30 years later. Financial Review, 40(1), 1–9 (2005).

15. Lo, A. W.: The adaptive markets hypothesis. The Journal of Portfolio Management, 30(5), 15–29 (2004).

16. Urquhart, A., & Hudson, R.: Efficient or adaptive markets? Evidence from major stock markets using very long run historic data. International Review of Financial Analysis, 28, 130–142 (2013).

17. Urquhart, A., & McGroarty, F.: Are stock markets really efficient? Evidence of the adaptive market hypothesis. International Review of Financial Analysis, 47, 39–49 (2016).

Data Availability

The datasets used and/or analyzed during the current study will be available from the authors upon reasonable request.

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License. Authors who publish this series agree to the following terms:

1. Authors retain copyright and grant the series right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this series.

2. Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the series's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgment of its initial publication in this series.

3. Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See Open Access Instruction).

Volume Title
Proceedings of the 7th International Conference on Economic Management and Green Development
ISBN (Print)
978-1-83558-083-7
ISBN (Online)
978-1-83558-084-4
Published Date
10 November 2023
Series
Advances in Economics, Management and Political Sciences
ISSN (Print)
2754-1169
ISSN (Online)
2754-1177
DOI
10.54254/2754-1169/31/20231498
Copyright
© 2023 The Author(s)
Open Access
This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited

Copyright © 2023 EWA Publishing. Unless Otherwise Stated