Behavioral Finance Market Hypotheses

Although the efficient market hypothesis (EMH) is the leading theory describing the behavior of financial markets, researchers have increasingly questioned its efficacy since the 1980s because of its inconsistencies with empirical evidence. This challenge to EMH has resulted in the development of new concepts and theories. These new concepts reject the assumption of investor rationality. The most promising and convincing among these are the adaptive markets hypothesis, overreaction hypothesis, underreaction hypothesis, noisy market hypothesis, functional fixation hypothesis, and fractal market hypothesis. The chapter provides a brief description of these theories and proposes using a behavioral perspective to analyze financial markets.