NEITHER EFFICIENT NOR ANIMALLY SPIRITED, BUT EVENTUALLY ADJUSTING: THE STOCK MARKET ACCORDING TO L.A. HAHN.

The Efficient Markets Hypothesis (EMH) was dealt a fatal blow by the financial crisis of 2007-2009, out of which we have witnessed a revival of Keynesian conceptions of the financial markets. Exemplifying this trend is the rising influence of behavioral finance. But if EMH exaggerates the rational side of human nature, behavioral finance goes too far in reducing us to slaves of the emotions. In search of a middle way, we explore the writings of L. Albert Hahn, a German banker and investor who made his name in the mid-20th century as a critic of Keynesian economics. Grounded on an Austrian understanding of the business cycle and uncertainty, Hahn depicts the stock market as being overwhelmingly inhabited by investors whose thinking is constrained by mass opinion. While this generates sustained irrational price movements, deviations from fair values are eventually corrected in a market process led by a few, independently minded investors. In Hahn's view, financial markets are neither efficient nor animally spirited, but eventually adjusting. [ABSTRACT FROM AUTHOR]

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