I somehow missed this WSJ piece [no sub required] from back in October that provides a nice overview of recent scuffles in efficient market theory. As the piece points out, efficiency-guy Eugene Fama seems to have softened his views somewhat, while behavioralist Richard Thaler is no less adamant.
Basically the piece comes down to this: How many market participants, or what percentage of traded dollars, has to be irrational before the market itself is no longer efficient? Fama implies that there is only sufficient irrational dollars for that to happen in rare cases; Thaler argues that inefficiencies are much more common than Fama might like. (Thaler is fond of the Palm example from 2000, when then-owner 3Com’s holdings in Palm were worth more than 3Com itself. Fama’s salty rejoinder about the anomaly: “Is this the tip of an iceberg, or the whole iceberg?”)
Who is right? While the momentum right now seems to be on the side of the behavioralists, there is a financial scorecard available: Mr. Fama’s Dimensional Fund Advisors, where he is a director, has $56-billion under management; Mr. Thaler is a principal at Fuller & Thaler, which has merely $2.4-billion in assets. Advantage: Fama — for now.