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Malkiel, Shiller, and the EMHIn the Journal of Economic Perspectives

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problem set 1 There are two big questions in it, I ask to answer the questions after reading the article, and I have uploaded the articles to be read. Every question is as accurate and comprehensive as possible, thanks.
Problem Set 1
Instructions: Answers must be typed. You may work as a group with other classmates. If you choose to work as a group, you should submit only one response for your whole group. Every group member’s name should be listed on the top of the page. Question 1: Malkiel, Shiller, and the EMHIn the Journal of Economic Perspectives
Winter 2003 issue, Burton Malkiel, the author of A Random Walk Down Wall Street, and Robert Shiller, winner of the 2013 Nobel Prize in Economics, published competing articles about the Efficient Markets Hypothesis (EMH).[1]In his article, Malkiel defends the EMH from critics, while Shiller argues in favor of a behavioral approach to understanding markets. Read both of these articles, which have been posted on Blackboard, then answer the following:How do Malkiel and Shiller define the EMH? Are their definitions the same? If not, how do they differ? Is it possible for one to be true while the other is false?What is Shiller’s main argument against the EMH? How does Malkiel respond to that argument?How does Shiller’s notion of “feedback” differ from the notion of feedback used by Hirshleifer, Subrahmanyam, and Titman (2006)[2] we discussed in class?In Shiller’s assessment, what are the obstacles to “smart money” correcting the price of mispriced assets in the market?According to Shiller, what are Eugene Fama’s critiques of behavioral finance, and how does Shiller respond to them?After reading both articles, how well do you think each of the authors defended their thesis? Which viewpoint do you find more convincing, or are the both (or neither) right? Why or why not?[1] Malkiel, Burton (2003). “The Efficient Market Hypothesis and Its Critics.” Journal of Economic Perspectives. Vol. 17, No. 1. 59-82.Shiller, Robert (2003). “From Efficient Markets Theory to Behavioral Finance.” Journal of Economic Perspectives. Vol. 17, No. 1. 83-104.[2] Hirshleifer, David, Avanidhar Subrahmanyam, and Sheridan Titman (2006). “Feedback and the Success of Irrational Investors.” Journal of Financial Economics. 81. 311-338.
Question 2: Jackets and CalculatorsIn their 1981 article in Science, Amos Tversky and Daniel Kahneman describe two versions of a hypothetical scenario they posed to survey groups and how they responded. These were the two versions:Version 1Imagine that you are about to purchase a jack for $125 and a calculator for $15. The calculator salesman informs you that the calculator you wish to buy is on sale for $10 at the other branch of the store, located 20 a minutes’ drive away. Would you make the trip to the other store?Version 2Imagine that you are about to purchase a jack for $15 and a calculator for $125. The calculator salesman informs you that the calculator you wish to buy is on sale for $120 at the other branch of the store, located 20 a minutes’ drive away. Would you make the trip to the other store?The authors found that substantially more people were willing to make the trip in version 1 of the story than in version 2, even though the savings of $5 were the same each time. We are going to explore this result.A. What is the total amount the individual will spend on the combined jacket and calculator combo if he does not make the trip in each version of the story?B. What will the individual spend on the jacket and calculator combo if he does make the trip in each version?C. According to expected utility theory, if an individual is willing to make the trip in version 1, would that person necessarily make the trip in version 2? Why or why not?D. According to prospect theory, if an individual is willing to make the trip in version 1, would that person necessarily make the trip in version 2? Why or why not? (You may use pictures to illustrate your point if you feel it would be helpful)

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Problem Set One
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Problem Set One
Question 1
Answer A
Burton Malkiel defines an efficient market hypothesis (EMH) as the notion of the security markets being extremely efficient when it comes to reflecting the information about the market and individual stocks (Malkiel, 2003). In other terms, Malkiel suggests that the data or news spreads faster as it arises and becomes incorporated into the securities prices. On the contrary, Robert Shiller defines EMH as the speculative asset or stock prices that incorporate relevant information pertaining to fundamental values where the costs only change when there exists sensible information that is supported well by theoretical trends in a particular time (Shiller, 2003). Malkiel and Shiller’s definitions portray the same thing. Overall, both of them are correct since they illustrate how the information affects the stock prices.
Answer B
Shiller’s primary argument against the EMH is called the volatility anomaly. In particular, he asserts that excess volatility makes the prices to change without an appropriate fundamental reason because of things that the author calls “sunspots” (Shiller, 2003). However, Malkiel responds by saying that the information can affect the stock price predictability. He says that EMH is affected by a “random walk,” where only the available data affects the stock prices at a specific time.
Answer C
Shiller’s perspective of “feedback” differs from that of Hirshleifer, Subrahmanyam, and Titman (2006). Specifically, Shiller argues that if speculative prices rise, investors get more profit, and that news reaches the public quickly. As such, the word-of-mouth increases the expectations that prices will continue to rise. If that information becomes uninterrupted, it generates further price increments, leading to a bubble. However, since the price is not sustainable, it does not last for an extended period before it starts falling tremendously.
Answer D
The primary obstacle to the “smart money,” as described by Shiller in correcting the price of mispriced assets in the market, is the irrational investment. Smart money can purchase the stock, but if it cannot own stocks due to the difficulty to short a stock, then it would not be able to sell stocks (Shiller, 2003). The other obstacle refers to ...
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