Behavioral economics and finance: Mathematics & Economics Article Critique

Economics
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Question 1: Malkiel, Shiller, and the EMH
Malkiel defines the EMH as the theory which posits that stock exchanges are very efficient in incorporating information about traded stocks’ prices and indeed, the entire stock market itself. Shiller defines the EMH as the theory which posits that hypothetical asset prices always include the best information about underlying values and that these change efficiently because of reliable information. These two definitions are similar because they focus on how the markets operate and how this reflects in stock prices. The definitions are the same because they focus on key aspects of stocks markets (their efficiency) and how well they operate (incorporation of information.
Shiller’s main argument against the EMH is that historical trends in stock markets experience express volatility which is at variance with the expected stability that EMH should bring. Malkiel on the other hand responds that the markets are efficient due to the fact that they do not allow investors to profit from ‘above-average risk adjusted returns’ and if it happens, then it is just an ‘anomaly’ that indiscriminately rewards both the professional and amateur investor
Shiller’s notion of ‘feedback’ is that it is self-reinforcing and perpetuating e.g. a rising stock price due to irrational excitement about a firm, which over several cycles may lead to a market bubble. Hirshleifer, Subrahmanyam, and Titman (2006) notion of feedback is that it is a consequence of stakeholders’ conscious efforts to improve a firm’s fate because when the company succeeds the stakeholders also succeed. Hence they differ in that Shiller considers ‘feedback’ a consequence of irrational behavior while Hirshleifer et al consider it a consequence of rational behavior.
The obstacles of ‘smart money’ correcting prices in the market include first, smart money lacking ownership of the stock and being unable to sort it and second, zealots trading among themselves and pushing smart money to the sidelines.
Fama’s critiques against behavioral finance include; anomalies appearing as under reaction by investors considered overreaction as well as anomalies disa...