The article seeks to reconcile the behavioral aspects of decision-making with the efficiency of markets and brings forth a new understanding of Adaptive Market Hypothesis (AMH).

One of the most influential ideas in portfolio management theory has been the Efficient Markets Hypothesis (EMH). According to this hypothesis, a stock market is a highly efficient pricing mechanism where stock prices fully reflect all currently available information on future stock returns. Any new information tends to get incorporated quickly and accurately into the stock prices through market trading.

The hypothesis is based on the fundamental assumption that all market participants have some rational expectations. In other words, they consider all available information while arriving at the most optimum decision—each and every time.

However, the relatively new discipline of behavioral finance has sought to challenge this hypothesis, by denying the very concept of rationality. The new school of thought opines that market participants are driven by fear and greed, and they do not always take optimum decisions that are based on logical and thorough analysis of all available information.

Portfolio Organizer Magazine, Adaptive Markets Hypothesis, Biological Evolution, Massachusetts Institute of Technology , MIT, Portfolio Management, Financial Engineering, EMH Theory, Conventional Financial Theory, Financial Markets, Economic Models, Market Behavior, Decision-Making Process.