Skip to content

Ronald J. Gilson & Reinier Kraakman, The Mechanisms of Market Efficiency Twenty Years Later: The Hindsight Bias, 28 J. Corp. L. 715 (2003).

Abstract: This article offers a brief, tentative assessment of the fit of behavioral finance with the framework developed twenty years ago in Mechanisms of Market Efficiency (MOME), and an even briefer and more tentative evaluation of the policy implications arising from the behavioral finance framework. It first puts market efficiency in an intellectual context - as part of the shift of finance from description to applied microeconomics that also included the development of the Capital Asset Pricing Model and the Miller-Modigliani Irrelevancy Propositions. It briefly recounts the MOME thesis, and describes the challenge of behavioral finance. It then offers an assessment of the central principles that drive behavioral finance, and evaluates how the MOME thesis stands up to the challenge. It next offers some MOME-based predictions about where it is likely that behavioral finance will and will not have significant policy implications, followed by a conclusion.