The Tyranny of the Efficient Markets Hypothesis

One of the greatest failings of the Efficient Markets Hypothesis (of which there are many) is its failure to account for the phenomenon of herd behavior. Dartmouth professor Karin S. Thorburn has an article on VoxEU arguing that U.S. companies' failure to voluntarily reduce their carbon footprints (I hate that term) is the result of herd behavior among investors. Yves Smith gets at the heart of Thorburn's article:

Apparently, investors do not buy the idea that investing in greater energy efficiency in an era of of $115 a barrel oil is compelling (and note that despite all the brouhaha about alternative fuels, using less energy will have a far greater impact).

How could investors be so ill informed? One possibility: socially responsible investing has gotten consistently bad press. It's generally depicted as a soft-headed way to guarantee inferior investment performance. Thus, being a skinflint about energy use, which like other types of cost-cutting is good for profits, is instead treated as naive do-gooderism and punished.

So yet again, the Efficient Markets Hypothesis becomes a self-fulfilling prophecy: investors think that investing in energy efficiency is bad for companies because that's what other investors think; when a company announces that it's investing in energy efficiency, investors flee the company's stock, and the stock price falls; investors then use the fall in the company's stock price as evidence that energy efficiency is bad a investment for companies.

This is the main reason I think the massive global warming PR campaigns, while overly moralizing and extremely grating, are nevertheless beneficial in the long-run.