Inefficient Markets An Introduction to Behavioral Finance [Hardcover]

The efficient markets hypothesis has been the central proposition in finance for nearly thirty years. It states that securities prices in financial markets must equal fundamental values, either because all investors are rational or because arbitrage eliminates pricing anomalies. This book describes an alternative approach to the study of financial markets: behavioral finance. This approach starts with an observation that the assumptions of investor rationality and perfect arbitrage are overwhelmingly contradicted by both psychological and institutional evidence. In actual financial markets, less than fully rational investors trade against arbitrageurs whose resources are limited by risk aversion, short horizons, and agency problems. The book presents models of such markets. These models explain the available financial data more accurately than the efficient markets hypothesis, and generate new predictions about security prices. By summarizing and expanding the research in behavioral finance, the book builds a new theoretical and empirical foundation for the economic analysis of real-world markets.

Are Financial Markets Efficient?
Noise Trader Risk in Financial Markets
The Closed-End Fund Puzzle
Professional Arbitrage
A Model of Investor Sentiment
Positive Feedback Investment Strategies
Open Problems

An excellent academic discussion of [stock mispricing] and other behavioral influences in the stock market. --Jeff Madrick,New York Review of Books

The only advanced undergraduate or graduate text available on the subject. --Jeffrey Wurgler,Yale School of Management

Andrei Shleiferis professor of Economics at Harvard University.