Crowd PHOTO BY CHUTTERSNAP ON UNSPLASH
In a lecture theatre at the University of Chicago in the spring of 1988, at an event dedicated to understanding Black Monday and the stock market crash of 1987, the behavioral economist Richard Thaler posed a question.
The audience Thaler spoke to comprised some of the best known efficient market luminaries of the day, a group that ardently believes the market price is always “right” and therefore correctly incorporates all known information into the valuation of a security.
Thaler’s question was straight forward and struck at the heart of the efficient market argument: Who in the room agreed that the present value of aggregate expected future dividends had suddenly changed enough to cause the market to fall by more than 20% in a single day?
In a room filled with efficient market thinkers, only a few hands went up.
Even Eugene Fama, one of the most highly regarded efficient market theorists and a future Nobel Prize winner, was slow to put his hand in the air.