Efficient Market Fantasy
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The crash of the market's high fliers makes Robert Haugen's 1999 book, “The New Finance, the Case Against Efficient Markets,#8221; a fitting choice for amateur theorists.
Haugen, a controversial academic, is a well-known critic of the efficient market hypothesis. His acerbic, punchy style makes the 140-page book an easy read despite the numerous reviews of market studies.
He dismisses the capital asset pricing model (CAPM) as “The Fantasy.” CAPM's believers — who preach that higher reward requires higher risk — are derided as “Zealots.”
Indeed, this self-described new finance economist fancies himself a “Heretic.”
Yet most brokers would concur with at least some of his arguments. Haugen's theory is that by avoiding the crowd you outperform the market.
“Investors overreact to new information about stocks, and they do so with considerable lag,” Haugen writes.
Efficient market theorists deny the obvious — that investors, even the pros, invest with fear and greed, Haugen says. We chase performance, never anticipating the speed at which stocks revert to the mean.
“The New Finance, the Case Against Efficient Markets” is published by Prentice Hall (ISBN 0130102288) and costs $27.60 at bookstores and online.
