RT Journal Article
SR Electronic
T1 Efficient Irrational Markets
JF The Journal of Portfolio Management
FD Institutional Investor Journals
SP 64
OP 72
DO 10.3905/jpm.2005.470579
VO 31
IS 2
A1 Les. Gulko
YR 2005
UL https://pm-research.com/content/31/2/64.abstract
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.