In this research paper, we examine the distinct theories of traditional and behavioural finance, linking them to efficient market hypothesis. The scope of the paper covers market anomalies as well as behavioural biases of individuals/analysts and the impact of such on portfolio construction. Over the last two (2) decades, behavioural finance has been growing steadily. This growth is associated with the realization that investors rarely behave according to the assumptions made in traditional finance and economics.
Traditional finance can be regarded as theories which are currently accepted in academic finance, in which the foundation is based on modern portfolio theory and the efficient market hypothesis. (Baker, 2013)Traditional finance has served to be the dominant paradigm for decades in which investors are guided with regards to decision making.
In congruent with the traditional finance theory, the efficient market hypothesis is one of the most accepted theories by academic financial economist. This hypothesis postulates that markets will perform efficiently when the…