Efficient Market?

The efficient market hypothesis, which represents the neoclassical (economic theory) virus within the corpus of corporate finance, presumes that market participants behave like computers, using a form of rationality that is devoid of fickleness, hubris, fear and other such emotions, with each computer programmed in a similar fashion (with modest variability in risk preferences) but with virtually identical information and decision-making algorithms occurring in an environment where lies are absent. If such was the case, then how does one explain the confusion, herd behavior, and searching for direction in all the wrong places that epitomized today's trading (and trading on many other days, as well)? How can rational economic agents overweight the events in the Middle East in a broad swath of stocks, many of which are the stocks of companies that would not likely be negatively impacted (in cash flow terms) by any resolution short of nuclear war (much less the tendency towards "herd" behavior in which no rational calculation whatsoever is involved), panic over a few earnings warnings (some of which were only modestly divergent from expectations) and negatively revalue another broad swath of stocks, many having already been discounted (such as Pfizer), and suddenly revalue most stocks dramatically downward? And even if the fears are correct, market participants are likely to change their minds about stock prices (and bid them up again) without any positive change in these "fundamentals," which further demonstrates that the reaction is not rational but emotional. So what's going on here with our efficient market? The answer is that the market is simply NOT a market of rational computer-like (neoclassical) beings. It is populated by human beings, who are social, subject to emotional swings, strongly influenced by group behavior, and capable of not even listening to their own rational calculations on the rare occasion when such a calculation is present. The fact that the market is not efficient does not, however, mean it is totally irrational or not a relatively efficient means of generating information (that may be useful in all sorts of ways, including for economic decision-making). The problem with mainstream economic theory is that it is mostly a lot of mumbo jumbo designed to justify the status quo, when what we should be trying to do is understand the way real markets (and other social institutions) function (and sometimes malfunction). Fortunately, there are a fairly large number of finance theorists and practitioners who make an effort to do just that, particularly those investigating behavioral finance, an increasingly popular sub-field.