T he battle between proponents of the Efficient Markets Hypothesis and champions of be-havioral finance has never been more pitched, and little consensus exists as to which side is winning or the implications for investment management and consulting. In this article, I review the case for and against the Efficient Markets Hypothesis and describe a new framework—the Adaptive Markets Hypothesis—i...

In this paper empirical tests for the overreaction and underreaction hypothesis in the Brazilian stock market are presented. For these tests, due to the complexity of these phenomena, a new model based on the fuzzy set theory is proposed. It is shown that such model is strongly connected with two heuristics of behavioral finance: representativeness and anchoring. The proposed model is used to f...

30TH ANNIVERSARY ISSUE 2004 THE JOURNAL OF PORTFOLIO MANAGEMENT 15 The 30th anniversary of The Journal of Portfolio Management is a milestone in the rich intellectual history of modern finance, firmly establishing the relevance of quantitative models and scientific inquiry in the practice of financial management. One of the most enduring ideas from this intellectual history is the Efficient Mar...

Market efficiency is at the center of the battle of standard finance versus behavioral finance versus investment professionals. But the battle is not joined because the term “market efficiency” has two meanings. One meaning is that investors cannot systematically beat the market. The other is that security prices are rational. Rational prices reflect only utilitarian characteristics, such as ri...

We test the predictions of the three main behavioral finance theories of market underand overreaction using out-of-sample data conditional on the nature of the news using the goingconcern audit opinion (bad news event) and its withdrawal (good news event). We find strong support for the Daniel, Hirshleifer and Subrahmanyam (1998) model for our bad news as well as the good news case suggesting t...

To provide a framework for understanding the implications of the decision-making process for financial market practitioners, throughout this reading we will use an approach developed by decision theorist, Howard Raiffa. Raiffa (1997) discusses three approaches to the analysis of decisions that provide a more accurate view of a “real” person’s thought process. He uses the terms normative analysi...