Explaining Stock Prices and Investor Behaviour An Anthology of TraditionalFinance Approaches and Its Fallacies
Keywords:
Traditional finance, efficiency of markets, investor rationalityAbstract
Theorists have intensely debated on how stock markets and investors behave for ages. Harry Markowitz in 1952 provided a strong conceptual foundation by proposing that portfolio construction has to be based on stock’s expected returns and investor’s risk tolerance, assuming investor rationality. Later on, a number of arguments followed on market’s efficiency and correctness of stock prices, behaviour of stock prices, whether the prices can be predicted or not. Termed as traditional or standard finance, these theories were compelling. Subsequently, many psychologists uncovered many fallacies and biases in investor behaviour, spurting out vehement opposition against traditional finance. Still, amidst the stiff opposition, the traditional finance
theories continue to fascinate and inspire financial thinking.
