Efficient Market Theory and Behavioural Finance

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EFFICIENT MARKET THEORY AND BEHAVIORAL FINANCE The behavior of markets and investors, the decision making in the market place and the dynamics of demand and supply in any given market cannot be determined with a hundred percent accuracy. However master minds in the past have designed various techniques and theories that help investors make a particular buying decision, or to make choices logically. These theories and techniques help today’s investors to peek into the future and make almost immaculate predictions regarding the future behaviour of the market and the ongoing trends. Someone without a financial background may view the decision making of an investor as being solely based upon speculation but in reality every move that an investor makes today in the market place is backed up by sound calculation and theories. Two of the most talked about and essential theories or concepts that are related to the market dynamics and that will be discussed at length in this assignment are Efficient Market Theory and Behavioural Finance. Efficient Market Theory suggests that in every financial market the flow of information is very efficient and this is reflected in the price of the share at which it is being traded . As we know that the price of the share floating in a market is not only dependent upon the company name printed and the information about the company in the balance sheet and other financial statements available to the public. In fact government and political stability, inflation, interest rates, treasury bills and several more factors determine the price at which any particular share is sold or bought at. Information about all these factors is always available to every investor in the market, be it the buyer or the seller. Moreover this information is available in an efficient manner and the buyer and the seller have the same level of information regarding

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