Title: Inefficient Markets An Introduction to Behavioral Finance

Author: Shleifer, Andrei Professor of Economics, Harvard University
Print publication date: 2000 (this edition)
Published to Oxford Scholarship Online: November 2003
Print ISBN-13: 978-0-19-829227-2

Abstract: This book describes an approach, alternative to the theory of efficient markets, to the study of financial markets: behavioural finance. It begins by assessing the efficient market hypothesis, emphasizing how some of its foundations are contradicted by psychological and institutional evidence. It then introduces the theory of behavioural finance and devotes the rest of the book to explore its main aspects, concentrating on the role and characteristics of noise traders, arbitrageurs, and investors. Chapters 2 through 4 focus on the limits imposed on arbitrage by factors such as risk aversion or agency problems. Two crucial conclusions are reached. First, plausible theories of arbitrage do not lead to the prediction that markets are efficient—quite the opposite. Second, the recognition that arbitrage is limited, even without specific assumptions about investor sentiment, generates new empirically testable predictions, some of which have been confirmed in the data. Chapters 5 and 6 center on how investor sentiments are built, emphasizing some empirical violations to the idea of efficient