We have gathered here in believing that there must be a way to profit from the stock market because there are many pioneers have succeeded. However, there have been much more who failed and the theory of finance claimed that theoretically all will fail sooner or later due to the "efficient market hypothesis" that prevailed for more than 40 years and was awarded Nobel Price in 2013.
Then, the question is: do we have a hope fooling around here because acting against theory is destined to fail based on our daily experience.
The following is my understanding of the most important question that justifies our activities here.
A specter is haunting the academic field of finance – the specter of a revolution.
The revolution is called upon by the failure of financial models in explaining market fluctuations, especially at times of market collapses (Mandelbrot and Hudson 2004, Derman and Wilmott 2009, Kaletsky 2009), by the dismal situation that two leading financial economists shared Nobel prize in 2013 for holding totally opposite views regarding the price formation and movement of financial market. The truth that the modern financial models repeatedly failed to guide the world out of economic crises triggered the radical question: “What went wrong with economics?” (Boulding, 1986, Economist.com 2009, Reiss 2011).
It has been realized that the current financial theories cannot understand the recurrent market crisis and a paradigm shift (Kuhn 1962) is needed (Soros 2009, Van der Burg, 2013, Gippel 2013).
However, as Kuhn pointed out, the old paradigm won’t give way until it is replaced by a new one. The old economic paradigm is based on the assumptions that market participants behave perfectly rational and the markets are functioning perfectly (EMH). Although behavioral finance theory collected piled up evidences suggesting that the efficient market hypothesis is wrong, it is still considered as in the same paradigm. As Dr. Fama put it: “Twenty years ago my criticism of behavioral finance was that it is really just a branch of efficient markets, because all they do is complain about the efficient market model. I’m probably the most important behavioral-finance person, because without me and the efficient-markets model, there is no behavioral finance. I still think there is no full-blown testable behavioral asset-pricing model.” (Chicago Booth Review, 2016).
Although it is not fair for behavioral finance theory because neither efficient market hypothesis has a “full-blown testable” model, who said the world is supposed to be fair?
The following effort is to get rid of all the unrealistic assumptions based upon by the old financial economic paradigm and view the stock markets from a totally different angle so that a new paradigm could be developed.
(to be continued)
Tue Feb 14, 2017 12:48 pm
oldguy Senior Member
Cash: $ 714.80
Joined: 21 May 2006
quote: get rid of all the unrealistic assumptions based upon by the old financial economic paradigm and view the stock markets from a totally different angle so that a new paradigm could be developed.
Why? Accept that the Market acts in a random manner, it cannot be predicted. (Kinda like trying to predict the next number from a random number generator.)