Fin/571 Week 5 Individual Capital Market Efficiency Paper

Capital Market Efficiency Paper Name Course Tutors Name Date Behavioral Challenges in Achieving Efficiency Economics and rational decision making processes require that market participants respond to market incentives in their financial decisions. The concept of market efficiencyis founded on rational behavior of market participants. Market efficiency implies that prices in a capital market reflect the real value of assets, as assessed by market participants who have full access to market information. Market efficiency also assumes that market participants quickly notice and react to anomalies in market prices. The behavioral challenges to achieving market efficiency arise when market participants fail make rational decisions. The decisions of each market participant are affected by the decisions of other participants these collectively influence the market behavior and in turn the decisions of all market participants. Therefore, the rational decision-making process that supports market efficiency is destroyedbecause the decisions that maximize individual benefits are those that best anticipate the market behavior. Market incentives thus lose value in guiding decisions in the capital market (Ross, Westerfield, Jaffe, Jordan, 2016). Forms of Market Efficiency There are three classes of market efficiency depending on the market information available. In weak-form market efficiency, all the available information is on