Editing Efficient-market hypothesis (section)

===Behavioral psychology===

[[File:Daniel Kahneman (3283955327) (cropped).jpg|thumb|180px|[[Daniel Kahneman]]]]
Behavioral psychology approaches to stock market trading are among some of the alternatives to EMH (investment strategies such as momentum trading seek to exploit exactly such inefficiencies).<ref>{{cite web |last1=Smith |first1=Lisa |title=Modern Portfolio Theory vs. Behavioral Finance |url=https://www.investopedia.com/articles/investing/041213/modern-portfolio-theory-vs-behavioral-finance.asp |website=Investopedia |access-date=10 October 2023}}</ref> However, Nobel Laureate co-founder of the programme Daniel Kahneman —announced his skepticism of investors beating the market: "They're just not going to do it. It's just not going to happen." Indeed, defenders of EMH maintain that behavioral finance strengthens the case for EMH in that it highlights biases in individuals and committees and not competitive markets. For example, one prominent finding in behavioral finance is that individuals employ [[hyperbolic discounting]]. It is demonstrably true that [[bond (finance)|bonds]], [[Mortgage loan|mortgages]], [[annuity (finance theory)|annuities]] and other similar obligations subject to competitive market forces [[bond valuation|do not]]. Any manifestation of [[hyperbolic discounting]] in the pricing of these obligations would invite [[arbitrage]] thereby quickly eliminating any vestige of individual biases. Similarly, [[diversification (finance)|diversification]], [[derivative (finance)|derivative securities]] and other hedging strategies assuage if not eliminate potential mispricings from the severe risk-intolerance ([[loss aversion]]) of individuals underscored by behavioral finance. On the other hand, economists, behavioral psychologists and mutual fund managers are drawn from the human population and are therefore subject to the biases that behavioralists showcase. By contrast, the price signals in markets are far less subject to individual biases highlighted by the Behavioral Finance programme. Richard Thaler has started a fund based on his research on cognitive biases. In a 2008 report he identified [[complexity]] and [[herd behavior]] as central to the [[2008 financial crisis]].<ref>Thaler RH. (2008). [http://www.fullerthaler.com/reviews/newsltr2008Q3.pdf 3Q2008].
Fuller & Thaler Asset Management.</ref>

Further empirical work has highlighted the impact transaction costs have on the concept of market efficiency, with much evidence suggesting that any anomalies pertaining to market inefficiencies are the result of a cost benefit analysis made by those willing to incur the cost of acquiring the valuable information in order to trade on it. Additionally, the concept of [[Market liquidity|liquidity]] is a critical component to capturing "inefficiencies" in tests for abnormal returns. Any test of this proposition faces the joint hypothesis problem, where it is impossible to ever test for market efficiency, since to do so requires the use of a measuring stick against which abnormal returns are compared —one cannot know if the market is efficient if one does not know if a model correctly stipulates the required rate of return. Consequently, a situation arises where either the asset pricing model is incorrect or the market is inefficient, but one has no way of knowing which is the case.{{Citation needed|date=January 2010}}

The performance of stock markets is correlated with the amount of sunshine in the city where the main exchange is located.<ref>{{cite journal|last1=Hirshleifer|first1=David A.|last2=Shumway|first2=Tyler|title=Good Day Sunshine: Stock Returns and the Weather|ssrn=411135|journal=Journal of Finance |volume=58 |issue=3|pages=1009–1032 |date=June 2003|doi=10.1111/1540-6261.00556}}</ref>