Inefficient Markets: An Introduction to Behavioral Finance

Paperback | May 15, 2000

byAndrei Shleifer

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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 actualfinancial markets, less than fully rational investors trade against arbitrageurs whose resources are limited by risk aversion, short horizons, and agency problems. The book presents and empirically evaluates models of such inefficient markets. Behavioral finance models both explain the available financial data better than does the efficient markets hypothesis and generate new empirical predictions. These models can account for such anomalies as the superior performance of value stocks, the closed end fund puzzle, the high returns onstocks included in market indices, the persistence of stock price bubbles, and even the collapse of several well-known hedge funds in 1998. By summarizing and expanding the research in behavioral finance, the book builds a new theoretical and empirical foundation for the economic analysis ofreal-world markets.

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From the Publisher

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 ...

Andrei Shleifer is Professor of Economics at Harvard University

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Format:PaperbackDimensions:224 pages, 8.5 × 5.43 × 0.51 inPublished:May 15, 2000Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0198292279

ISBN - 13:9780198292272

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Table of Contents

Are Financial Markets Efficient?Noise Trader Risk in Financial MarketsThe Closed-End Fund PuzzleProfessional ArbitrageA Model of Investor SentimentPositive Feedback Investment StrategiesOpen Problems

Editorial Reviews

"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