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In my world, a non-powerfuble world, stock rates are driven by greed, fear and hazard evaluation, or speculation, and there is nothing remotely rational about any of those three attributes. If investors were not greedy, why not just invest in some short term Federal bonds and enjoy their smaller earnings? Why hazard their capital in the stock market, where they stand a chance to lose more and make more? Of that's easy isn't it? Greed. People are not happy with the paltry returns on savings accounts or short term Treasuries...they want more and are willing to take on some hazard in order to make more money. And they seldom fully understand the hazard they are taking.
In my world fear, greed and hazard are the prime movers in price action, and Efficient Market Theory has no real contingencies for these emotional responses in explaining market movement, and every time a value bubble bureaucracy the Efficient Market Theory climbs one notch lower at the ladder.
I'll tell you the issue, to my way of thinking. In Efficiently Market Theory, freshwater economists assume that investors are rational in their buying of securities.
Speculators simply assess hazard, constantly through probability, and trade where the opportunity seems best to make money and then bank their profits. Many speculators depend very heavily on technical evaluation, which is something akin to a mortal sin to an Efficient Market Theorist. Yet us scalpers and speculators continue to make money on a system that academia says cannot exist because there are few pricing anomalies in the market.
In the last decade we have endured a kind of market bubbles ending in catastrophic losses for investors and bankruptcy for more than a couple of corporations. In the Efficient Market world, all securities are priced, or discounted to their exact and suitable price because investors are rational, and can take into consideration all known advice concerning the security, and subsequently price it accurately. We can throwEfficient Market Theory's unnatural spawn into the combination, the Capital Asset Pricing Model which is assumes investors and investments are the result of rational thought.
On the other hand, fear is an even more intriguing investing emotion. Last fall and early this year we had a catastrophic plunge in the stock market. We don't need to talk about the reasons why this came about, as the facts are well documented. Many of my friends hung in their 401(k) mutual finances until the market nearly bottomed and then exited, fearing they were in danger of dropping all of their money. It's the old buy high and sell low syndrome...their fear got the higher of them. Any rational investor would look at a 50 or 60% drop in the market, assuming they had not gotten out early, and think "what's the use in getting out now." The ruin is done. Yet careful research of market collapses or crashes displays the small investor hangs in till the end, then sells.
