Collective Wisdom in the Stock Market
At the CFA Intstitute Efficient Market and Behavioral Finance conference in June 2007, Legg Mason’s Michael Mauboussin suggested that both market efficiency and behavioral anomalies could be explained by viewing the market as a complex adaptive system.
Under this model the only conditions required are that investors have diverse opinions, that there is an aggregation mechanism to bring information together, and that there are incentives for being right and penalties for being wrong.
The model explains breakdowns in market efficiency (bubbles and busts) as violations of one or more of the conditions. The most likely violation is diversity of opinion, and the occasional herding tendency of investors. It can also occur on a smaller scale when short-term noise is interpreted incorrectly as signal.
For more information, see all articles on: Behavioral Finance, Fundamental Analysis, Investing in Stocks, Passive Management See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
