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In finance, market efficiency, or equivalently, the Efficient Market Hypothesis, assumes that the market can transmit information completely, instantly, and freely so that asset prices reflect the fair value of the investment. An efficient market would imply that the prices were always right and that no group of investors should be able to consistently beat the market. In this article, I review the evolution of modern finance and the evidence for and against the Efficient Market Hypothesis. Decades of empirical research and historical events, such as dot-com bubble and the 2007-2008 Global Financial Crisis, resulted in a paradigm shift and made behavioral finance mainstream. I also offer some theological thoughts about finance research on this topic. I argue that our behavioral biases in investing betray our finitude, noetic effects of sin, as well as our impulse-and-intuition-driven humanity. More importantly, I argue that God is behind everything in a probabilistic way, not a deterministic way and tail events may be an important part of God’s mysterious design.

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Economics Commons


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