The Mechanisms of Market Inefficiency: An Introduction to the New Finance

Abstract

This article challenges the efficient market hypothesis by documenting systematic patterns of market inefficiency and examining the structural factors that prevent arbitrageurs from correcting mispricings. Shleifer argues that behavioral biases among investors, combined with limits on arbitrage, can produce persistent deviations of asset prices from fundamental values. The analysis has significant implications for securities regulation, suggesting that markets may not be self-correcting and that regulatory intervention may be necessary to prevent bubbles, fraud, and systemic risk.

Key Findings

• Systematic behavioral biases can cause persistent deviations from efficient market prices
• Limits on arbitrage—including short-sale constraints and funding risk—prevent correction of mispricings
• The efficient market hypothesis is an inadequate basis for securities regulation
• Regulatory frameworks should account for behavioral realities of market participants

Related Statutes

• Securities Act of 1933
• Securities Exchange Act of 1934
• Dodd-Frank Act

Related Cases

• Basic Inc. v. Levinson (1988)
• Halliburton Co. v. Erica P. John Fund (2014)