Classifications Of Market Efficiency Beliefs

Almost all financial economists believe in basic market efficiency for large markets and liquid Financial markets are securities. No respectable economist believes that it is easy to get very rich trading on easily pffibenty cloSe to available information. Instead, the disagreement is, loosely, about whether stock markets are efficient.

"99% efficient" or "97% efficient." The school of thought that proposes the 99% view is often called Classical Finance or Rational Finance; the school of thought that proposes the 97% view is often called Behavioral Finance. Of course, you can trade millions of dollars in large firm stocks or market indexes relatively easily and at low transaction costs. Thus, it does not require huge efficiency violations for behavioral finance economists to be right and for classical finance economists to be wrong. Exploiting just the tiny—say, 3%—violations from market efficiency could make you a star investor. (This is also not coincidentally why so many fund managers show great interest and publicly proclaim their faith in behavioral finance.) However, don't take me too literally here—the 99% vs. 97% is an analogy, and there is really a spectrum of beliefs in market efficiency among economists and fund managers. Although you should realize that any classification schemes really identifies just segments on a continuous line, you can still try to classify economists by their faiths in efficiency.

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