Efficient Market Theory vs. Behavioral Economic Theory

Efficient Theory-2R


Thanks for a great blog. 
Mr. Armstrong,
I´d like to know your opinion for efficient market hypothesis. Theory states it is impossible to beat the market because market efficiency. I know you disagree with that, but is there any theory which states that markets can´t be efficient? And what’s your opinion of behavioral finance theory?
Thank you,
Kind Regards,
ANSWER: Efficient market theory does not work because markets always overshoot and undershoot. Markets can remain undervalued for decades as was the case for the Dow Jones between 1934 and 1985. Then they play catch-up all of a sudden. Commodities also perform in such a manner others claim are manipulations.
Behavioral economic theory, which many are just now starting to realize, states that markets trade on anticipation, and not necessarily on facts — buy the rumor, sell the news. This is all behavior oriented. We panic not always understanding why, just following the herd. Investing becomes a herd mentality or behavioral economics.