Explain the concept of the Efficient Market Hypothesis (EMH), and each of its three (3) forms.

 

What are the fundamental claims of behavioral critique of the Efficient Market Hypothesis (EMH)?

According to behavioral finance, “information processing errors” can cause investors to engage in information-influenced irrationalities. Describe the four (4) types of “information processing errors” discussed in Chapter 9.

 

Behavioral finance claims that even if information processing were to be perfect — i.e. market participants would have perfect access to information and the same capacity to interpret or use that information as the EMH claims – individuals tend to make “irrational choices” due to “behavioral biases.” Describe the two (2) types of “behavioral biases” discussed in Chapter 9.

 


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