Economic, Psychological, and Social Explanations of Market Behaviour
Economic, Psychological, and Social Explanations of Market Behaviour
Although the efficient markets paradigm of neoclassical economics can explain most of the actions and behaviour occurring in the aggregate market, this has shown two major weaknesses, since there are concerns that are left out of the explanation and some important failures have been observed at the margins. First, this chapter presents the strengths and weaknesses of the efficient markets paradigm, including the forms of trading that cause convergence between market prices and efficient prices. Some of the concepts that the efficient markets paradigm cannot explain include: noise trading, excess volatility, equity premium, overreaction to news, and speculative bubbles and crashes. A new approach identifies people with naïve economists, naïve psychologists, and as naïve politicians, to further understand the behaviour of market players.
Keywords: efficient markets paradigm, neoclassical economics, noise trading, volatility, equity premium, neoclassical economics, crashes
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