Although behavioral finance has been gaining support in recent years, it is not without its critics. Some supporters of the efficient market hypothesis, for example, are vocal critics of behavioral finance.
The efficient market hypothesis is considered one of the foundations of modern financial theory. However, the hypothesis does not account for irrationality because it assumes that the market price of a security reflects the impact of all relevant information as it is released.
The most notable critic of behavioral finance is Eugene Fama, the founder of market efficiency theory. Professor Fama suggests that even though there are some anomalies that cannot be explained by modern financial theory, market efficiency should not be totally abandoned in favor of behavioral finance.
In fact, he notes that many of the anomalies found in conventional theories could be considered shorter-term chance events that are eventually corrected over time. In his 1998 paper, entitled "Market Efficiency, Long-Term Returns And Behavioral Finance", Fama argues that many of the findings in behavioral finance appear to contradict each other, and that all in all, behavioral finance itself appears to be a collection of anomalies that can be explained by market efficiency.
Over the last 30 years, psychologists and economists have joined forces to study how people process information and actually make decisions, rather than how they would make decisions if they were fully rational and selfish. The new field that this collaboration has spawned, dubbed behavioral economics, has provided an understanding of how people’s decisions deviate from “optimal” choices as well as the consequences of such deviations for consumers, managers, firms, and policy. This joint concentration between the Operations, Information, and Decisions and the Business Economics and Public Policy Department explores the behavioral aspects of economics and decision-making. The concentration provides students with the opportunity to develop an understanding of: (a) the neoclassical rational actor model, (b) modifications to that model which reflect the psychology that drives human behavior, and (c) implications of those modifications for decision-makers, markets and public policy.