The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?

The sharp economic downturn and turmoil in the financial markets, commonly referred to as the “global financial crisis,” has spawned an impressive outpouring of blame. The efficient market hypothesis (EMH)—the idea that competitive financial markets exploit all available information when setting security prices—has been singled out for particular attention. Like all successful theories, the EMH has major limitations, even as it continues to provide the foundation for not only past accomplishment, but future advances in the field of finance. Despite the theory's undoubted limitations, the claim that it is responsible for the current worldwide crisis seems wildly exaggerated. This essay shows the misreading of the theory and logical inconsistencies involved in popular arguments that EMH played a significant role in (1) the formation of the real estate and stock market bubbles, (2) investment practitioners' miscalculation of risks, and (3) the failure of regulators to recognize the bubbles and avert the crisis. At the same time, the author argues that the collapse of Lehman Brothers and other large financial institutions, far from resulting from excessive faith in efficient markets, reflects a failure to heed the lessons of efficient markets. In the author's words, “To me, Lehman's demise conclusively demonstrates that, in a competitive capital market, if you take massive risky positions financed with extraordinary leverage, you are bound to lose big one day—no matter how large and venerable you are.” Finally, behavioral finance, widely considered as challenging and even supplanting efficient markets theory, is viewed in this article as complementing if not reinforcing efficient markets theory. As the author says, “it takes a theory to beat a theory.” Behavioralism, for all its important contributions to finance literature, is described as not a theory but rather “a collection of ideas and results”— one that depends for its existence on the theory of efficient markets.     

Issues in the Design and Reform of Commodity Taxes: Analytical Results and Empirical Evidence

The motivation of this paper is two fold: (a) review the literature on design and reform of commodity taxes, (b) describe attempts at extending the traditional framework. The paper states the principal results in optimal commodity taxation with attention paid to assumptions made in their derivation. Empirical evidence on the structure of optimal commodity taxes is presented with special reference to the issue of uniformity versus selectivity, and the redistributive potential of commodity taxes. The paper, then, provides analytical and empirical evidence on the following extensions to the traditional framework: (i) presence of child subsidy and demographic effects on demand, (ii) fiscal federalism, (iii) tax evasion.     

An efficient estimator using auxiliary information

The use of ratio and product methods of estimation using auxiliary information for estimating the mean of a finite population is well known.Srivastava [1967] andReddy [1973] proposed ratio-cum-product type estimators. This paper proposes a transformed estimator which is even more efficient than these estimators for a wide range of the value of the correlation coefficient between the main and auxiliary variables.     

Microsimulation of Business Performance

Microsimulation of business performance based on sample survey data is a relatively underdeveloped field, but its application in government economic policy formulation is potentially great since it can be used to measure the distributional effects of change rather than just average change. Techniques which account for the dynamic response of businesses to macro level price expectations have recently been developed (Kokic et al. , 1993). These allow individual level business performance to be forecast from sample survey data. In this paper we outline a general methodology for combining these forecasting techniques with Monte Carlo simulation in order to produce a microsimulation of business performance that accurately captures the true distributional characteristics of the underling survey data. Applying this methodology to Australian farm survey data, we show that these methods may be used to forecast the distribution of farm business production and performance within arbitrary subdomains of the surveyed population conditional on a given set of expected commodity price outcomes. The microsimulations reflect both the uncertainty due to climatic variation from one year to the next, which in the Australian context depends largely on geographic location, as well as the uncertainty of commodity prices.     

Leadership training for managers: An Adlerian approach

Adlerian theory—a social model of human behavior—provides an effective framework to improve managerial practices and enhance organizational leadership. Developed by Alfred Adler (1870–1937), founder of the influential school of individual psychology, Adlerian theory promotes principles of social interest, democracy, and encouragement. These principles may guide leaders in building collaborative, productive workforces through participative management, coaching, and employee engagement. Experiential training exercises that integrate Adlerian principles can help managers expand their interpersonal competencies and increase leadership effectiveness.