We believe that markets are inefficient because time and again market participants behave illogically, basing their decisions on emotion rather than rational thinking. Emotionalism is generally agreed to be the largest contributing factor to failure in the market place. When traders become emotional they become irrational, and when they become irrational they make bad investment decisions. In fact, some of the most epic failures in business as a whole can be linked to psychology. Emotions like fear, greed, regret, remorse, confidence and pride often result in flawed decision making. It's these bad decisions, decisions driven by emotion, that create temporary mispricing's in the stock market that can be exploited for profit by the astute trader.
If markets were efficient, in other words market participants behaved rationally and logically, trading would offer few opportunities for consistent profit. However, as we shall illustrate below, markets are not efficient. Some of the most compelling evidence of market inefficiency caused by trader irrationality has been put forth by proponents of behavioural finance. Behavioural finance, when market participants base decisions on emotion, is diametrically opposed to theories of random market behaviour and efficient market hypothesis. In 2002 Daniel Kahneman was awarded the Nobel Prize in economics for his work on behavioural finance which resulted in broad acceptance of the theory by the academic community.
We are avid supporters of behavioural finance and focus all our research efforts within this field.