• Global Frameworks: CFA Level 3 (Behavioral Finance).

1. The Efficient Market Hypothesis (EMH) Core Baseline
Developed by Eugene Fama, the EMH states that financial markets fully reflect all relevant information, making it impossible to consistently generate alpha without taking on additional risk. The hypothesis is split into three forms:
┌───────────────────────────────── EMH Forms ─────────────────────────────────┐
▼                                             │                               ▼
[Weak-Form]                                   ▼                     [Strong-Form]
Reflects historical price data;          [Semi-Strong Form]         Reflects all public AND
Technical analysis is futile.            Reflects all public data;  private insider information;
                                         Fundamental analysis is    No alpha is possible.
                                         futile.

2. Behavioral Biases and Market Anomalies
Behavioral finance challenges EMH by demonstrating that investors are not perfectly rational actors, but are subject to systematic cognitive errors and emotional biases:
  • Loss Aversion (Prospect Theory): Developed by Kahneman and Tversky, this theory shows that individuals feel the pain of a financial loss roughly twice as intensely as the pleasure of an equal gain. This bias often leads investors to hold onto losing positions too long hoping to break even, while selling winners too early.
  • Overconfidence: Investors routinely overestimate their analytical abilities, leading to excessive trading volume and higher transaction costs.
  • Anchoring: Becoming overly attached to an initial piece of information (such as the historical purchase price of a stock) when evaluating subsequent value changes.
  • Market Anomalies: Empirical patterns that contradict the EMH, such as the January Effect (historical stock outperformance during the first month of the year) or the Momentum Effect.
PreviousNext