Preservation-part I: "Market efficiency or behavioral finance: the nature of the debate"

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

The purpose of this paper is to show that the discourse about market efficiency and what is called “behavioral finance” is somewhat superficial. Beneath the surface of quasi-scientific debate, there are issues that go to the core of what knowledge is and how it is to be acquired in financial economics. The concern in this paper is with ontology (what is to be known) and epistemology (how it is to be known), and how conversations about both in financial economics are conducted. We show that the arguments against the empirical validity of studies at variance with the hypothesis of efficient markets cut both ways. We also show that the disputation of behavioral finance lacks the rigor commonly demanded by all schools of philosophy of science Then, not a formal debate, but a two-and-a-half-hour battle with Gene Fama. His closing comment to me after dinner that evening was “You have pushed me an epsilon toward the abyss”, Driving home that night, in a really hard rain, I had a long time to ponder that statement. Why is it an abyss? And why only an epsilon? I concluded that it is only an epsilon because they are afraid of the abyss. And what is in the abyss? The abyss is the realization that we have crossed the line where we can no longer explain most of the market’s behavior on the basis of rational economic paradigms.-Robert Haugen in “Post Modern Finance” (The International Review o f Financial Analysis. 1998, 6: p. 159).