Market efficiency, behavioral finance and decision making: evidence from Europe and Latin America

Abstract

The paradigm of the efficient markets is assumed in classical economic models. Nevertheless, unpredictable financial crises raised doubts on the objectivity of market efficiency and its capacity to resemble the decision-making of the interacting agents. This paper studies the concept of market efficiency and its implications; and tests empirically whether there is evidence of weak-form efficiency in multiple European and Latin American markets. Additionally, the paper studies the decision making among inefficient markets and highlights the contribution of behavioral economics in understanding investors’ reasoning and cognitive biases, and in explaining the lack of efficiency in real financial markets.