Financial Crisis During 2007 And 2008: Efficient Markets Or Human Behavior?

Abstract

The recent U.S. financial crisis, the U.S. stock market crash of 1987, and other recent anomalies have seriously challenged Fama’s classic efficient capital markets hypothesis. These events have made it likely that future capital markets research will be enriched by the important role that human behavior plays in the success or failure of the financial markets. This paper examines the factors causing the recent crisis within the United States financial services sector, the degree to which it may be explained by efficient capital markets theory and the degree to which such behavioral finance concepts as noise, excessive volatility, fashion and fads, and irrational behavior compromise that theory.