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From the Efficient Market Hypothesis to Behavioral Finance: The Evolution of Finance Theory

Author

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  • Meltem Gürünlü

    (Maltepe University)

Abstract

This study aims to analyze how finance theory evolved over time from Efficient Market Hypothesis (EMH) to Behavioral Finance and put forward the results for investors, corporate finance decision makers, market regulators and policy makers by examing pros and cons of EMH which had gained both theoretical and empirical sucess since it’s first appearance in 1960’s till the beginning of 1980’s. For this aim, a detailed literature survey is conducted. It is found that the factors affecting efficient markets such as arbitrage and investors rationality are limited and weaker than what the EMH theorists claimed. As a result, we can not claim that Behavioral Finance has grown up to be a coherent theory and completely replaced traditional finance theory. But, the analytical tools and testable models provided by EMH are enriched by various applications of Behavioral Finance which takes into account factors such as investors pshycology and human behaviors and EMH continues to serve as a benchmark to analyze the differences between what should be in theory and what happened in reality.

Suggested Citation

  • Meltem Gürünlü, 2011. "From the Efficient Market Hypothesis to Behavioral Finance: The Evolution of Finance Theory," Journal of Finance Letters (Maliye ve Finans Yazıları), Maliye ve Finans Yazıları Yayıncılık Ltd. Şti., vol. 26(92), pages 31-50, July.
    • Handle: RePEc:acc:malfin:v:26:y:2011:i:92:p:31-50
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    Keywords

    Efficient Markets Hypothesis (EMH); Behavioral Finance; Security Prices;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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