Stock Market Anomalies Essay Example | Topics and Well Written Essays - 500 words

Stock Market Anomalies - Essay Example In finance, anomalies are market activities not in agreement with the forecasting of the efficient market hypothesis (EMH). In detail, these anomalies seem to breach premises of mean-variance ratio or no-arbitrage. If a multifarious adaptive scheme approach better depicts markets, the supposed anomalies investigators have keyed out may not be abnormal after all. The modern EMH model can be summed up in the "three P's of Total Investment Management" (Lo, 1999): prices, probabilities, and preferences. The three P's have originated from one of the most fundamental and vital estimates of modern economics, the rationale of supply and demand. This precept submits that the price of any goods and the quantity sold are fixed by the intersection of supply and demand arcs. The intersection of these two arcs influences "equilibrium" comprising the pair of price-quantity which might satisfy both the user and the producer at the same time. How or why do markets fail Several reasons can be attached to this question. But the simplest reason is the heterogeneity of the investors which breaks down and the every capitalist starts to act in harmony which leads to either extreme optimism which is greed or pessimism which is fear. The teachings of social psychology are that people like to imitate one another thus giving weightage when being in group rather than to individual's own reflections.