After decades of theoretical and empirical evidence for

After
decades of theoretical and empirical evidence for and against the EMH,
economists still have not yet reached a consensus about whether markets, mainly
financial markets are definitely efficient. The result of all the literatures
studied solidifies the resolve of the proponents of each side of the debate.
One of the explanations for this state of affairs is that the EMH, is solely
not a well-defined and empirically refutable hypothesis, one must specify
additional structure, for example investors’ preferences. More importantly,
what is more significant is the efficiency of a particular market relative to
another i.e. futures vs. spot markets. From a practical point of view and in
the light of Grossman and Stiglitz (1980), the EMH is an idealization that is
economically unimaginable, but works as a useful standard for measuring
relative efficiency.

?. A Neuroscientist view

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To
get additional insights I refered to the literature of the cognitive
neurosciences. This research led to a significant reformulation of
psychological models of decision making; which involved research tools such as
positron emission tomography (PET) and functional magnetic resonance imaging
(MRI) (Lo, 2005), where an array of images of the subject’s brain was captured
in real time as questions were being asked. The results were determined and
interpreted by the detecting the amount of blood flow in certain areas of the
brain, before, during and after the task The activation in certain parts of the
brain were linked to the performance of the task.

One
major discovery was that there is an apparent link between rational behaviour
and emotion; which shed light on financial decision-making. How? Damasio (1994)
discovered that the ability of patents who had underdone surgical removal of
brain tumours, to make rational choices suffered. A patient, code-named Elliot,
experienced a profound effect on his day-to-day activities after his emotional
faculties were removed from his brain. Damasio (1994) noticed that his flow of
work at a point in time stopped, focusing on something else that was
captivating. It was as though Elliot had become irrational concerning the
larger frame of behaviour in his daily decision.

Is
the source of irrationality, emotion? Behaviour can be viewed as the observable
indication of interactions among several components of the brain, sometimes
competitively and others cooperatively. Nevertheless, under other
circumstances, emotional responses can overrule more complex deliberations,
neuroscientists have shown that emotion is the first response in the sense that
individuals exhibit emotional reactions to objects and events far quicker than they
can articulate what those objects and events are (Zajonc, 1980).

As environmental
conditions change, so does the relative importance of each component of the
brain, individuals are able to adapt to new situations by learning and
implementing more advantageous behaviour and this is often accomplished by several
components of the brain acting together. As a result what economists call
‘preferences’ are often complicated interactions among subcomponents within each
of the three parts of the brain; this perspective implies that preferences may
not be stable through time, but are likely to be shaped by a number of factors,
both internal and external to the individual, i.e., factors related to the
individual’s personality, and factors related to specific environmental
conditions in which the individual is currently situated. This neuroscientific
perspective suggests an alternative to the EMH, one in which market forces and
preferences interrelate to yield a much more dynamic economy, one driven by
competition, natural selection, and the diversity of individual and
institutional behaviour. This is the essence of the Adaptive Markets Hypothesis