In its most popular form, the efficient market hypothesis (EMH) is the claim that asset prices reflect all publicly available information. The EMH is an important cornerstone for most asset pricing models. But it is also highly controversial. Critics claim that models based on the EMH are to blame for the inability of predicting and avoiding the global financial crisis of 2008/9.
In this seminar, first, we discuss the the key arguments for and against the EMH. Exploring the persistent controversy around the EMH will lead us to a core issue in the philosophy of science: the question of whether one can ever falsify a single hypothesis. We will explore this using case studies on the reaction of financial markets to the disaster of the Challenger space shuttle, and the futures market for oranges.
Second, we will look at the role the EMH plays in financial markets today. Who is using it, how are they using it and does it matter? We will discuss two arguments stating that the ‘false belief in efficient markets’ (i) causes financial crises and (ii) leads markets to be short-termist.
Third, we will discuss alternatives to the EMH which have been suggested by economists and behavioral psychologists. We will discuss the implications of their work for financial regulation and for public debates about the financial system.
Get the seminar briefing pack.
Summer 2016, with Carsten Jung
Philosophy and Economics Seminar, University of Bayreuth