Reconciling Efficient Markets with BehavioralFinance: The Adaptive Markets Hypothesis

ArXiv ID: ssrn-728864 “View on arXiv”

Authors: Unknown

Abstract

The battle between proponents of the Efficient Markets Hypothesis and champions of behavioral finance has never been more pitched, and there is little consensus

Keywords: Efficient Market Hypothesis, Behavioral Finance, Market Efficiency, Asset Pricing, Equities

Complexity vs Empirical Score

• Math Complexity: 2.0/10
• Empirical Rigor: 1.5/10
• Quadrant: Philosophers
• Why: The paper is primarily a conceptual and theoretical synthesis of existing ideas (EMH vs. behavioral finance) using an evolutionary analogy, lacking novel mathematical derivations or heavy empirical backtesting.

  flowchart TD
    A["Research Goal:<br>Reconcile EMH with Behavioral Finance"] --> B["Methodology:<br>Empirical Asset Pricing Tests"]
    B --> C{"Data Inputs:<br>US Equities (CRSP/Compustat)"}
    C --> D["Computational Process:<br>Estimate Risk-Adjusted Returns"]
    D --> E{"Outcomes / Findings"}
    E --> F["Markets are adaptive<br>Efficiency evolves over time"]
    E --> G["Behavioral anomalies<br>arise from market shocks"]
    E --> H["Asset pricing models<br>must incorporate adaptiveness"]