Abstract
Statistical analysis of interest rate forecasts published in the Wall Street Journal since 1981 suggests that investors do not need to be rational for market prices to be efficient. A market populated by imperfect agents can be efficient if there are enough agents and they are suitably interconnected. That is, numbers and interaction compensate for individual imperfections. A maximum–likelihood model of a market inhabited by irrational heterogeneous investors produces a distribution of interest rate forecasts that agrees with the Wall Street Journal polls. From a practical viewpoint, if price efficiency is independent of individual rationality, then passive index investing dominates active investing, whatever the individual investor behavioral biases.
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