Rational markets: Yes or no? The affirmative case

With the recent flurry of articles declaiming the death of the rational mar ket hypothesis, it is well to pause and recall the very sound reasons this hypothesis teas once so widely accepted, at least in academic circles. Alth ough academic models often assume that all investors are rational, this ass umption is clearly an expository device not to be taken seriously. What is in contention is whether markets are "rational" in the sense that prices ar e set as if all investors are rational. Even if markets ave not rational in this sense, abnormal profit opportunities still may not exist. In that cas e, markers may be said to be "minimally rational." I maintain that not only ave developed financial markets minimally rational, they are, with two qua lifications, rational. I contend that, realistically, market rationality ne eds to be defined so as to allow investors to be uncertain about the charac teristics of other investors in the market. I also argue that investor irra tionality, to the extent that it effects prices, is particularly likely to be manifest through overconfidence, which in turn, is likely to make the ma rket "hyper-rational. " To illustrate, the article reexamines some of the m ost serious historical evidence against market rationality.