PT  - JOURNAL ARTICLE
AU  - Les. Gulko
TI  - Efficient Irrational Markets
AID  - 10.3905/jpm.2005.470579
DP  - 2005 Jan 31
TA  - The Journal of Portfolio Management
PG  - 64--72
VI  - 31
IP  - 2
4099  - https://pm-research.com/content/31/2/64.short
4100  - https://pm-research.com/content/31/2/64.full
AB  - Statistical analysis of interest rate forecasts published in the Wall Street Journal since 1981 suggests that investors do not need to be rational for market prices to be efficient. A market populated by imperfect agents can be efficient if there are enough agents and they are suitably interconnected. That is, numbers and interaction compensate for individual imperfections. A maximum–likelihood model of a market inhabited by irrational heterogeneous investors produces a distribution of interest rate forecasts that agrees with the Wall Street Journal polls. From a practical viewpoint, if price efficiency is independent of individual rationality, then passive index investing dominates active investing, whatever the individual investor behavioral biases.