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The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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Chapter 14: Andrei Shleifer Moves Beyond Rabbi Economics

The efficient market’s critics triumph by showing why irrational market forces can sometimes be just as pervasive as the rational ones.

In 1985, MIT graduate student Andrei Shleifer assembled what he thought was compelling evidence against the efficient market hypothesis. He found that, starting in September 1976—the month after Vanguard launched the first retail index fund—new stocks being added to the S&P 500 went up relative to the rest of the market. Nothing else had changed about these businesses. Their intrinsic value had not grown. In an efficient market, such things weren’t supposed to happen. [1]

Shleifer presented his conclusions at the annual meeting of the American ...

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