Should It Be Called “Behavioural” Finance?

Despite all the resources that have gone into studying the field of finance, there is still not one concise theory that can fully explain price action in financial markets. The lack of data and presence of behavioural factors make the “laboratory” a challenging environment to control for specific variables; thus, the field of finance is still regarded as a “soft science.” This blog post by Albert Bridge Capital is an interesting look at the current stalemate between two schools of thought in academic finance. On the one side, proponents of the Efficient Market Hypothesis (EMH) acknowledge some of the shortcomings inherent in the theory but are skeptical to yield that it has been disproven, given there is no other (publicly accepted) framework to explain financial market price action. On the other side, behavioural finance advocates opine their research has shown EMH does not hold, despite not being able to put forth a “testable” theory to take its place. The blog post advocates for ceasing to use the term “behavioural finance,” as the “behavioural” portion of the title is the main reason for disproving EMH and should be a redundant phrase given that investor behaviour should be incorporated into financial market modeling. As it stands, the momentum factor is probably the closest that academic finance has come to quantifying the behavioural component of financial markets, but it is far from fully explaining the presence of irrationality and non-Gaussian return distributions in financial markets.