Money Brain: This is your brain on stocks

Ever since I was a graduate student in economics, I’ve been struggling with the uncomfortable observation that economic theories often don’t seem to work in practice. That goes for that most influential economic theory, the Efficient Markets Hypothesis, which holds that investors are rational decision makers and market prices fully reflect all available information, that is, the “wisdom of crowds.”

Certainly, the principles of Efficient Markets are an excellent approximation to reality during normal business environments. It is one of the most useful, powerful, and beautiful pieces of economic reasoning that economists have ever proposed. It has saved generations of portfolio managers from bad investment decisions, democratizing finance along the way through passive investment vehicles like index funds.

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