It Takes a Theory to Beat a Theory: The Adaptive Markets Hypothesis

Naked Capitalism has the article It Takes a Theory to Beat a Theory: The Adaptive Markets Hypothesis. I wholeheartedly agree with the premise of the headline, but in my ill-considered opinion, this theory isn’t it.

We begin with this simple acknowledgment: market inefficiencies do exist. When examined together, these inefficiencies and the behavioral biases that create them are important clues into how that complicated neurological system, the human brain, makes financial decisions.

As Bill Black has pointed out numerous times, the people who brought on the financial collapse were acting completely rationally. They crashed their own corporations not out of irrationality. They did it because they were trying to make themselves rich, and they didn’t give a damn about the corporations they were looting in the process.

In this case, I am going to apply Occam’s Razor to conclude that Bill Black’s explanation is more likely to be the correct theory.

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