Since the beginning of the 1970s, almost all financial economists believed in and accepted the efficient market hypothesis. Eugene Fama also known as intellectual father of the “efficient-market hypothesis” argued that it was impossible to “beat the market.” This idea was widely accepted because it held great sense and was easy to understand.
Mr. Fama began his studies in the 1950s when he worked on a market-forecasting newsletter. Mr. Fama realized that human beings were working with strategies that didn’t quite work out. Fama wrote in his 1965 paper “In an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value.” This meant that the stock prices were changing everyday and there was no real was to predict what a stocks actual price would be in the future.
Efficient market hypothesis is very controversial and often times people go against the theory. In 1191, Famas theories began to fade away. Fama began to realize that there was no possible was that the market was efficient enough to predict the price of a stock or search for an undervalued stock. A good example would be when the economy goes into a recession. There was no possible way to predict that the economy would take a down turn so fast.
On the other side of the fence is the behaviorist group of economists. The behavioral finance concept is based on rational theories. The thought process is that people behave rationally and predictably. Richard Thaler, a member of the “behaviorist”school of economic thought changed this vision. He expressed concern that people tend to make irrational or stupid decisions.
Thaler collected much evidence that people constantly made irrational decisions that made absoluetely no sense financially. One of his examples was a tennis player who kept playing tennis with a bad elbow even just so he would not waste the club membership fees. It is very irrational that this tennis player would risk hurting himself more because he paid a $300 membership fee, when in the long run his medical bills would far outweigh the membership fees.
Thaler also made investors realize that only in a rational world would data be up to date and share prices change when new data hit the market. He made these investors realize that prices and information is changing at the NYSE every single second. The data is changing and is very unpredictable.
In my humble opinion the efficient market hypothesis should have never even existed. Human beings are constantly looking out for themselves and will penny pinch every last penny or will reluctantly ignore data and spend selfishly. I myself, and a behaviorist and I act on emotion. If I want it, I simply buy it. On some things I do not try to wait until it seems to be at the lowest price, then again on others I will wait it out.