* Change undermines their basic approach. EMH and other such economic axioms allow people to proceed in the manner they know best. They are, after all, trained far more thoroughly in statistical method than in behavioral psychology.

all swans are white, the researchers should not concentrate their efforts searching for more white swans. On the contrary they should search for black swans, because finding even one would destroy the theory.EMH researchers have not followed Poppers teachings. Not only have they continued to search for white swans, but they have put together an un-relendng campaign to extinguish black swans-the anomalies that cannot exist if EMH is correct.

Thomas Kuhn in his classic work. The Structure of Scientific Revolutions, takes a tolerant approach to the issue. It is essential, Kuhn writes, for scientists to have a paradigm from which to work. A paradigm, as you may recall from chapter 1, is the current body of theory the scientific community in a field accepts and works within.

Like an accepted judicial decision, says Kuhn, the paradigm is the body of knowledge that is used as a frame of reference from which to conduct new work. "Paradigms gain their status because they are more successful than their competitors in solving a few problems that the group of practitioners has come to recognize as acute."* Thus, efficient markets in the early years provided the explanation of prices fluctuating randomly, which showed why technicians could not consistentiy outperform markets. It provided a body of studies that appeared to indicate the market reflected new information almost instantaneously, thereby making it impossible for investors to act on it to outperform the averages.

Kuhn notes that "normal science does not aim at novelties of fact or theory and, when successful, finds none." As the paradigm becomes widely accepted, its tools and methods become more deeply rooted in the solution of problems. The accepted tools for broadening the efficient market paradigm were beta and MPT.

The goal of normal science is not to question the reigning paradigm, but to explain the world as viewed through it. Anomalies that contradict the basic tenets of the paradigm are a serious challenge to it. A paradigm must be able to explain the anomalies or it will eventually be abandoned for a new one that does provide explanations that the first one cannot.

Thus scientists would naturally defend their paradigm. They prefer to believe that all swans are white and do not search for black ones. If they find black swans-the anomalies to EMH are such an example-they try to explain tiiem within the theory. A change in a paradigm is a nerve-racking and difficult period with much acrimony.*

Its adherents have a vested interest in upholding the validity of the old paradigm, because all their knowledge and experience is tied up in it. Rejecting their paradigm is often equivalent in a literal sense to rejecting their religion. Kuhn writes that many older scientists will never give up the current paradigm, others accept parts of it and try and integrate die old with the new. Usually, it takes a new generation of researchers to completely accept a new paradigm.

Kuhn also brings up a critical point. Scientists will never abandon a paradigm, no matter how harsh the criticism, unless they have a more compelling one to take its place, one that will solve most of the problems the old one could not. It is not su rising then, that even with the major challenges put to EMH, the hypothesis has not been abandoned. Even when the central tenets of the theory have been destroyed empirically, it lives on; as with Hydra, when one head is chopped off, two new ones grow in its place. Thus, when beta was destroyed, the deans of efficient markets stated there was another measure of risk out there waiting to be discovered; or when some value methods were shown to outperform the market, they claimed they were more risky. EMH is following the precise course of scientific discovery that Kuhn predicted.

Kuhn notes diat new research is not only rejected, but its adherents have at times been punished. Thus, Bruno, a Renaissance poet and philosopher, was bumed at the stake and Galileo was imprisoned. The fact that EMH researchers seem intolerant of work that opposes their theory is certainly predicted by the history of scientific discovery. Perhaps not su risingly, there is no fomm for dissenting thought, as the academic journals normally do not publish work they consider at odds widi their paradigm, including that of knowledgeable Wall Streeters and psychologists.

Too, EMH adherents are not above attacldng research that disagrees with the beliefs. In the early eighties for example, both Barwns and Forbes ran feature stories questioning the efficacy of EMH. The result was an onslaught of critical letters from hundreds of academics that lasted for months. The most common theme was, how could the magazines dare to challenge the work of the distinguished researchers?

Another disagreeable characteristic of changes in paradigms, demonstrated again with EMH, is the researchers noticeable silence when they meet a challenge to their work that they cannot answer, as with the small cap theory and, for a long time, with beta and contrarian strategies.

Finally, as I noted in chapter 7, some of the researchers are not above taking credit for anomalies first found by nonacademic researchers- sometimes a decade or more before them. Perhaps even worse, the academic journals are, in effect, "in the pockets" of the major EMH

Its adherents have a vested interest in upholding the validity of the old paradigm, because all their knowledge and experience is tied up in it. Rejecting their paradigm is often equivalent in a literal sense to rejecting their religion. Kuhn writes that many older scientists will never give up the current paradigm, others accept parts of it and try and integrate the old with the new. Usually, it takes a new generation of researchers to completely accept a new paradigm.

Kuhn also brings up a critical point. Scientists will never abandon a paradigm, no matter how harsh the criticism, unless they have a more compelling one to take its place, one that will solve most of the problems the old one could not. It is not surprising then, that even with the major challenges put to EMH, the hypothesis has not been abandoned. Even when the central tenets of the theory have been destroyed empirically, it lives on; as with Hydra, when one head is chopped off, two new ones grow in its place. Thus, when beta was destroyed, the deans of efficient markets stated there was another measure of risk out there waiting to be discovered; or when some value methods were shown to outperform the market, they claimed they were more risky. EMH is following the precise course of scientific discovery that Kuhn predicted.

Kuhn notes that new research is not only rejected, but its adherents have at times been punished. Thus, Bruno, a Renaissance poet and philosopher, was burned at the stake and Galileo was imprisoned. The fact that EMH researchers seem intolerant of work that opposes their theory is certainly predicted by the history of scientific discovery. Perhaps not su risingly, there is no forum for dissenting thought, as the academic journals normally do not publish work they consider at odds with their paradigm, including that of knowledgeable Wall Streeters and psychologists.

Too, EMH adherents are not above attacking research that disagrees witii the beliefs. In the early eighties for example, both Barrons and Forbes ran feature stories questioning tiie efficacy of EMH. The result was an onslaught of critical letters from hundreds of academics tiiat lasted for months. The most common theme was, how could the magazines dare to challenge the work of the distinguished researchers?

Another disagreeable characteristic of changes in paradigms, demonstrated again with EMH, is tiie researchers noticeable silence when they meet a challenge to their work that they cannot answer, as with the small cap theory and, for a long time, with beta and contrarian strategies.

Finally, as I noted in chapter 7, some of the researchers are not above taking credit for anomalies first found by nonacademic researchers- sometimes a decade or more before them. Perhaps even worse, the academic journals are, in effect, "in the pockets" of the major EMH