This document outlines the format for an essay comparing the views of Eugene Fama and Robert Shiller on market efficiency and behavioral finance. The essay should include: 1) Background on market efficiency and behavioral finance; 2) A discussion of Fama's views supported by research and examples; 3) A discussion of Shiller's views supported by research and examples; 4) A conclusion on market efficiency and recommendations for the fund based on the research.

1. EFB201 Essay – Possible Format
Introduction
- Brief background to market efficiency and behavioural
finance and the
implications for your firm
2. Discussion of Fama’s views
- Include research (e.g. journal articles) and real world
examples (e.g. what some
fund managers have done) that support or disagree with his
arguments.
3. Discussion of Shiller’s views
- Include research (e.g. journal articles) and real world
examples (e.g. behaviour
of markets) that support or disagree with his arguments.
4. Conclusion on market efficiency and recommendations for
the firm.
Introduction
Market efficiency is the level in which prices are aligned to all
available, sufficient and relevant information. The concept was
developed by an economist by the name Eugene Fama. Fama
noted in the theory of Efficient Market Hypothesis that, it Is
impossible for an investor to outdo the market because all
information that is available is constructed in stock prices.
Market efficiency weighs the availability of market data which

2. provides huge amount of opportunities to buyers and sellers to
conveniently transact without adding unnecessary transaction
cost. On other hand, behavioral finance is a field that seeks to
blend behavioral and cognitive theory of psychology with
economic and finance to provide explanation to why people
make illogical decisions. There are many instances where
people’s psychology affects their decisions making them to
make irrational decision. Behavior finance is a new method that
came to existence to respond to problems faced by early
investors. The concept of behavior finance argues that some
financial situations can be clearly understood using principle
that are fairly rational.
Market Efficiency
Market efficiency is a theory of financial economist that
argues that prices of various assets reflects the information that
is available. The approach explains that stock trade a reasonable
prices compelling investors either to buy stock that is
underrated, or dispose stock with inflated prices. This implies
that, is impossible for investors to outshine the whole market
and the only way to realize high return from investments is by
chance of acquiring risky investments.
Classification of market efficiency
Weak efficiency
In this classification of market efficiency, futures stock prices
cannot be determined by looking at past trends. Returns in the
long run cannot be made by just looking at historical data.
Performing technical analysis will show no consistency in
production of excess return, but rudimentary analysis may
exhibit excess return. Stock prices will show no interrelation,
implying that there is no pattern that exist that can be used to
set prices. With this in mind, expected prices are determined by
data not available in the price series and prices must assume an
unplanned walk. In this category of market efficiency, it is not
mandatory for prices remain at equilibrium, but only the
investors who have responsibility of generate profit out of
market inefficiencies.

3. Semi-strong Market efficiency
This class of efficient market Hypothesis suggest that all
available information is manipulated into stocks current share
price, implying that neither fundamental nor technical analysis
can be used to realize high profit. Semi-strong Market
efficiency allow use of information that is publicly available,
which can be used by investors who are seeking to make
abnormal profits.
Strong Market efficiency
This type of market efficiency advocates that all information;
publicly available or not publicly known, can be used to account
for current change in prices. The approach does not give an
investor any advantage over the market and advocates that an
investor cannot make profit that is above market returns,
irrespective of data or data retrieved or researched.
Efficiency and market assumptions
Efficiency in markets suggests that financial markets uses all
known data sources. How long a market hypothesis can last is
debatable? But in regard to this, whether or not market
efficiency is useful in financial marketing concepts which show
the behavior of financial markets situations. Efficiency markets
puts into consideration, that important information is a
reflection to real market situation and assumes that financial
figure are always set correctly. There is assumption that stock is
never underrated or overvalued. It implies that investors in the
stock markets cannot outperform the entire market by adopting
extensive growth strategies.
Implications of Market Efficiency
The market efficiency has been a reliable hard evidence
though it is not correct to say it is conclusive of all the events
that happens. Market efficiency is based on high degree of
acceptance amongst the interested group which plays an
important role on supporting practical conclusion on market.
Instead of selecting stock, it makes more sense to acquire funds
using passively manageable approaches which are characterized
with low commissions and be in a position to derive a full

4. marketing returns. When picking potential employees or shares,
it is considered a good approach not to have people who have
high hiring and remuneration cost because the anticipated profit
margin is not that too high. When people are trying to beat a
high performing company, it is good to attempt and beat the
market by having rational ideas about market efficiency. In
respect to this approach, it is advisable not to try to outperform
the market by having intelligent markets but having better fund
managers who put more effort in identifying market efficiency.
Some practitioners argue that it is justifiable to have bad
securities which are characterized by market inefficiency.
Individual should not feel isolated or have a bad feeling about
their portfolio analysis but instead, they should develop a better
way of judging their analysis.
Financial Markets
Essay Semester One 2017
Weighting = 40%
Length = 2000 words
You work as a researcher at an active equity fund. Your
supervisor makes the following statement to you.
“Eugene Fama and Robert Shiller won the Nobel Prize in
Economics in 2013. Their views on market efficiency and
behavioural finance are, however, quite different.”
She assigns you the task of writing a critical essay evaluating
the arguments of the two Nobel Laureates. Your essay should
include any implications of your research for the future
direction of the fund. You should utilise existing literature
(scholarly journals) on market efficiency and behavioural
finance as well as real world examples to support your
conclusion.