A Moderate Viewpoint to Efficient-Market Hypothesis and Behavioral Finance: the Efficiency of the Behavior of Participants in Transactions

Document Type : Review article

Authors

• Mohammad Hossein Setayesh
• Abdolmajid Sarmadinia

Department of Accounting, School of Economics, Management & Social Sciences, Shiraz University, Shiraz, Iran

10.22067/ijaaf.v3i1.79558

Abstract

After behavioral finance was introduced, disagreements arose between advocates of behavioral finance and those of efficient-market hypothesis, such that the two financial areas were regarded as contradictory by experts in the profession. In contrast to the prevailing view, it seems that the two approaches are not at odds. Therefore, the purpose of this paper is to study address these two financial areas through a moderate approach. The present study examined works existing in the field of finance using analytical-critical approach and finally extracted the concept of “market behavior efficiency” through deductive reasoning. Accordingly, the prevailing view in the present research states that “in any point in time, the degrees of concepts presented in efficient-market hypothesis and behavioral finance prevail in stock market”, influencing the prices. This paper concludes that the market price of any financial asset is composed of three components: producers’ cost (primary cost or value); the effect of investors’ proper reaction to the good and bad news about the firm issuing the financial asset; and the effect of investors’ improper reactions to the available news (i.e. the effect of investors’ errors when making decisions). An analysis of the prevailing conditions in a market and factors effective on the formation of price of its available assets provide a vital insight into how related officials, domestic and international investors act. So, it brings about outcomes for determining investment strategies and academic literature.

Keywords

• Efficient-Market Hypothesis
• Behavioral Finance
• Market Behavior Efficiency

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