According to Gupta et al. (2012), by the beginning of the 21st century, the inte

Question

According to Gupta et al. (2012), by the beginning of the 21st century, the intellectual dominance of market efficiency had become considerably less universal. A new school of thought called behavioural finance advanced the existence of psychological and behavioural factors that determine stock-price movements. Critically review the two fundamental paradigms i.e. efficient market hypothesis and the theory of behavioural finance and reflect on whether stock prices are predictable based on one or both of these theories. The essay is 2000 words but i would really appreciate having a detailed guideline as to what exactly i need to include in the essay. Thank you!

Explanation / Answer

According to conventional financial theory, the main objective of the investors is wealth maximization. However there are many instances where emotion and pyschology influence our decisions which causes us to behave irrational and in unpredictable way.

Behavioral finance seeks to combine behavioral and cognitive psychological theory with conventional finance to provide explanations to "why people make irrational financial decisions".

Efficient market hypothesis predicts and explains certain events . However, over the time, the anomalies and behaviors started to come out which couldn't be explained by this theory. The real world is infact flooded with the market participants who often behaves unpredictably.

The stock prices shall be predictable based on both of these theories as the anomalies of one theory get overcome by the other theory.

Guideline as to matters which are required to be included in the essay:

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