Preservation-part II: "The role of anomalies in finance: what are they and what are they good for?"

Official URL: https://dx.doi.org/10.4324/9781315188911

In the natural sciences “anomalies” contribute significantly to the development of new and ultimately more successful theories. The role of anomalies in financial economics, however, has been quite different. Although at the beginning the word was used to show deviations from the Efficient Markets Hypothesis/Capital Asset Pricing Model paradigm, lately it has been applied to a new literature that is also more accurately called Behavioral Finance. This paper argues that this misuse and misapplication of the word “anomaly” is not a simple coincidence. It is rather a sophisticated and accordant effort to imply that although there are some unresolved deviations from the norm, the reigning paradigm is irreplaceable, and its validity needs no empirical proof. In fact, an alternative paradigm such as Behavioral Finance is not only insignificant but also unnecessary and even impossible.