Abstract and Keywords
This article sketches a sociological approach to the question of market efficiency — that is, whether financial market prices accurately reflect the ‘intrinsic’ or ‘fundamental’ value of financial assets. It advances an approach that integrates three perspectives on social valuation generally and financial market pricing in particular: the ‘realist’ perspective, represented by the efficient market hypothesis, which holds that financial markets are both allocatively and informationally efficient due to the processes of arbitrage and learning that swiftly eliminate any mispricings; the ‘pure constructionist’ perspective, whereby prices bear no relation to intrinsic value; and the ‘contrarian’ perspective, which is best represented by value investors who direct investors to opportunities that can be exploited by discerning short-term gaps between price and value. It is argued that each of these perspectives is based on sound principles, but that each has important weaknesses. The article presents an integrative approach that carries three main lessons: asset prices are governed by theories of value that translate economic indicators into price; specific institutional conditions are required for weak theories to be replaced by stronger theories, thereby leading to a more efficient market; and an understanding of these institutional conditions — in particular, the need for a vehicle for effectively communicating the full range of opinion and reaction to material information — is critical to guide policy on how financial markets should be constituted and regulated.
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