Eugene Fama: There’s No Such Thing As Behavioral Finance

Johnny HopkinsEugene FamaLeave a Comment

In his recent interview with The Market NZZ Eugene Fama discussed interest rates, inflation, oil prices, and why he’s not a believer in behavioral finance. Here’s an excerpt from the interview:

Against that backdrop, what do you make of the growing discipleship of behavioral finance which focuses on the influence of psychology on investment decisions and questions the efficiency of markets?

What I say is that we agree on the facts but we disagree on the interpretation. In my view, there is no such thing as behavioral finance. Essentially, it’s just a criticism of efficient markets. They don’t have a theory of their own. Hence, that makes me the most important person in behavioral finance. Without me, they don’t have anybody to disagree with. So I think behavioral finance is just a branch of efficient markets.

But what about factors like emotions, herd mentality or cycles? Aren’t they important at all?

Tastes and behavior are important in economics. Nobody denies that. But you have to translate these things into something testable, so we can take the data and test it, looking forward and not looking backward. That’s my response to all that stuff. It never works out.

Yet, we also know that investors regularly mix up similar-looking stock tickers or company names and thereby cause absurd movements in stock prices. How is this rational behavior?

It isn’t. You can identify mistakes like that. It’s common that names confuse investors and as a result, you can get temporary price movements. But they are usually tiny and go away quickly. I don’t say markets are completely efficient, but they’re efficient for most questions that I address. Models are never a 100% true. If they were, we would call them reality, not models. But for almost all purposes, market efficiency is a very good approximation. I’ll go even further: Almost all investors should regard markets as efficient for their own investment decisions. If they do that, they will be better off in the long-term.

You can read the entire interview here:

Eugene Fama Interview The Market NZZ

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