Date Posted: 2006
Full text (original)
The essay begins with a brief history of various economics "discoveries" which were thought to destroy the credibility of the standard neoclassical paradigm. In each case the author shows how the standard paradigm parried the attack and co-opted the parts of the new criticisms that were worthwhile or how new theories developed to respond to demonstrated gaps in the older view. So it is with Behavioral Finance, which has certainly demonstrated weaknesses in the present corpus of economic theory but has not substituted anything that will work nearly as well. This absence of a general theory is sufficient to place Behavioral Finance along with the other "revolutions" that failed, even though the behavioralists scored significantly against the efficient market crowd. But neither Behavioralism nor the Efficient Market theory provides us with any understanding of how new information gets impacted into prices, even though we know the mechanisms by which this process occurs. The development of such a theory might be related to the development of the theoretical framework on so-called prediction markets.