Practical analysis for investment professionals
15 May 2014

Poll: Are Market Movements Best Explained by EMH or Behavioral Finance — or Both?

Are financial markets efficient or not? This simple question has motivated thousands of pages of research with no concrete conclusion. An often-overlooked component of the efficient market hypothesis (EMH) is that active management cannot outperform the market on a risk-adjusted basis. Simply “beating” the market does not constitute outperformance because it often fails to account for various forms of risk. Another factor is time. Over what period can you outperform (on a risk-adjusted basis)?

Daniel Kahneman won a Nobel Prize in economics when he showed that investors are not perfectly profit seeking and display flawed behavior in different situations (e.g., investors tend to take risks to avoid losses and to lock in gains when probabilities suggest they should take risks). As the debate evolved, Andrew Lo of MIT published a paper on the adaptive markets hypothesis, which incorporates both EMH and behavioral elements.

At the 67th CFA Institute Annual Conference, which concluded last week, speaker Cliff Asness told delegates that he subscribed to elements of both the EMH and behavioral finance. When we polled the CFA Institute Financial NewsBrief audience, around 80% who answered the poll agreed with Asness. In the final analysis, is the EMH correct, or do markets reflect the tenets of behavioral finance? I think we can answer “yes.”

Which of the following statements reflects your opinion as to what best explains market movements?

Poll: Which of the following statements reflects your opinion as to what best explains market movements?


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Rob Gowen, CFA

Robert Gowen, CFA, was Head of Product Solutions at CFA Institute, where he oversaw a team of content directors that contribute daily. Prior to joining CFA Institute, he worked in the institutional investment industry for BB&T and Fidelity Investments. Gowen earned a BA in economics from Washington University in St. Louis and an MBA from the Darden School at the University of Virginia.

3 thoughts on “Poll: Are Market Movements Best Explained by EMH or Behavioral Finance — or Both?”

  1. Samson Zimuto says:

    I 100% agree with Cliff Asness.

  2. JOHN TAABAVI says:

    In my Finance studies i have often tried to identify what drives investment decision making especially in developing economies, Risk, Return, Market movements, investor sentiments .Is there any research opinion on this subject matter that i can refer to?

  3. John – Thank you for your comment. You have an excellent question and one that is subject to a lot of debate. The Research Foundation of CFA Institute published a literature review on emerging market investing.
    You can also visit our website ( or publications site ( and do some searches.

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