February 2020
Selective Investing
The EMH – or Efficient Market Hypothesis – has played a central role in modern financial theory. Although some components of the theory date back to the beginning of the 20th century, EMH was established in the 1960s largely due to Eugene Fama’s theoretical and empirical research. “EMH teaches that investors have rational expectations and that through arbitrage competition will create in aggregate an efficient market. As new information enters the marketplace […], investors will become aware of it and immediately will act rationally to adjust the price to the new equilibrium value of the [financial] security”i. More recently however, Behavioural Finance advocates challenged this notion of efficient markets, dismissing the assumptions of investors' rationality. Modern psychology teaches us that even the most rational individuals are exposed to cognitive biases.
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