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 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 that 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 Perhaps not su risingly, there is no fomm for dissenting thought, as the academic journals normally do not publish work they consider at odds with their paradigm, including that of knowledgeable Wall Streeters and psychologists.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 Barrons 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

The New Paradigm

We have come a long way in the last 400 pages, from examining and rejecting conventional mores to finding a new and well-documented investment paradigm. This paradigm has its roots firmly imbedded in the psychology of the marketplace. As we now know, all the anomalies have one common denominator-investor psychology.

Psychology is both the reason for the consistently superior performance of the methods the financial academics cannot explain, as well as the consistently poorer results of those approaches that fail. Yet, psychology is not only misunderstood, but ruled out at source by most of the current generation of financial scholars.

The study of investor behavior in markets is still in an embryonic stage. Although we can statistically trace pattem after pattem of investor behavior, we know litde of the dynamics of the complex interacdons of cognidve, group, and other psychological forces that underlie them. Psychology offers the marketplace the opportunity to gain a much clearer understanding of what causes predictable behavior. The marketplace in tum offers the various branches of psychology a major laboratory to pinpoint pattems of behavior unlikely to be as statistically documented in such depth anywhere else.

Even if you agree with what I have written, it wont be an easy row to hoe. Psychological forces and conventional wisdom will continually tug

researchers. They are not above pubhshing this work as being "newly discovered" by members of their group.

This then is the dark side of EMH. But, put it in context; it is not very different from the protest and rancor when any established body of knowledge is threatened by inexplicable facts.

If I have been somewhat harsh on EMH, it is because I cannot accept the manner in which its case has been built. Although I do not believe the hypothesis, I certainly respect the arduous experimental efforts made by the many researchers in this area. They have brought the winds of change to Wall Street, long overdue. Investors who are really interested in how the market works must genuinely appreciate these university researchers. Much of the research was necessarily tedious, dull, and time consuming, but it was essential in building the foundation of a new investment structure.

Without the thorough measurement of technical and fundamental performance records. Wall Street would have continued in the old, unsuccessful-often disastrous-ways, with no impetus toward change.

us away from the investment decisions that have the highest chances of succeeding and towards the mediocre. Given the right circumstances, well convince ourselves were seeing green, when we are actually sitting in one of the red rooms of our casino, betting away a big chunk of our savings.

Still, you have a good chance of doing well, if you can keep in mind the principles that drive contrarian strategies, and stay clear of the behavioral pitfalls that have taken their toll on so many generations of investors. When I wrote my first book. Psychology and the Stock Market, more than two decades ago, I was convinced that once readers saw clearly how effective a low P/E strategy was, and the reasons it worked, everyone would be on this bandwagon in a flash. The bandwagon is still empty 20 years later, although there are scores of self-professed contrarians around.

Contrarianism is more a catch-all term to describe counter-opinion to any aspect of markets, rather than the disciplined investment strategies oudined in this book. Thus Robertson Stephens has a contrarian fund that it advertises extensively in The Wall Street Joumal. Its "contrarian strategies" are light-years away from those descrih)ed in this book. There are also contrarian technicians, market timers, and from what Ive read, astrologers.

No, the amazing thing is that even though many contrarian stirategies are well known on the Street, they are not nearly as widely followed as I would have expected after more than two decades, in spite of the fact that the evidence supporting them has grown almost exponentially. Knowing the power of psychology on investment decisions back in 1977, I still badly underestimated its abihty to inhibit winning stirate-gies.

This is not bad news. For it means you have the same opportunities to use a contrarian approach that the investor of several decades ago did. If anything, the investment odds have shifted even more in your favor -cause of the numerous new contrarian strategies that we have demonstrated. Investing can be a probability game with the odds on your side. Going back to the image in chapter 1 of the green and red rooms in the casino, I think a careful reader should now be able to walk into the green rooms where the players are few but the winnings are big, and avoid the thronged red ones where most of the crowd is losing.

Do your homework, think for yourself, and prosper.