Finance question?

Emeline Albracht: The Efficient Market Hypothesis states more or less that markets function "well", and that the prices of traded securities (stocks, bonds, etc) already include all the relevant information.For instance, the second the market knew that Microsoft wanted to buy Yahoo!, the stock skyrocketed. So even before you heard about the news, the stock price already reflected that information.OTOH, behavioral finance states that stock prices are not entirely efficient, partly due to cognitive / emotional biases in investors that prevent them to make rational choices.For instance, imagine that investors overreacted to bad news. A slight dip in consumer confidence, and they go crazy and sell sell sell. The next day they go back go work and collectively think "oops I overreacted, let's buy now". Momentum trading (http://en.wikipedia.org/wiki/Momentum_investing) and other forms of technical trading are based on inefficiencies, which in turn may be explained by cognitive b! iases (behavioral finance)Thus:If people have cognitive biases on a collective scale (just one individual won't do), then they may fail to correctly assess the value of securities. In turn, if you know that, you can do some arbitrage (buying when they overreact and then selling afterwards), which is EXACTLY what the EMH says you shouldn't be doing. If the theories of behavioral finance are right, then EMH is wrong (at least partially).Cheers...Show more

Daren Ventrice: I see nobody is answering. If someone chooses to, then more power to you - however, you are taking a risk when you post homework questions here, as you have no idea whether anyone who answers is academically gifted or not (i.e. a person can be very successful in world of investing but still not be able to answer finance or economics questions correctly). Not to mention the fact that you have a teacher, classmates, and textbook that are more familiar with material you are studying and would be better qu! alified to help you arrive at correct answer....Show more