The conventional wisdom of academic investment theorists is taking a terrible beating in the post-bubble era. Rightly so, in the case of the efficient market theory, which now gives rise to growing scepticism.
The notion that stocks follow a random walk and all available information is in the price has always looked suspect in the light of history, which repeatedly tells us that Homo economicus is not the rational man of the economists' musings and that markets are prone to periodic bubbles. In its strongest form it even attributes the success of investors such as Warren Buffett and Fidelity's Anthony Bolton to pure luck, which to my mind is too strong by half.
The role of mob psychology and hysteria in markets was chronicled by the 19th-century writer Charles Mackay in his book Extraordinary Popular Delusions and The Madness of Crowds, which amounts to a snub to believers in the magic of the market. Mackay is a better guide to the change of sentiment that produced the stock market crash of 1987 than any efficient market theorist. That has not deterred economists from trying to explain away the 17th- century Dutch tulip mania as a rational reflection of an acute imbalance of supply and demand for rare bulbs: no matter that the price of garden variety tulips went through the roof, too. If these heroic efforts smack of desperation there is nonetheless a good argument that bubble exuberance can be rational, where investors knowingly engage in momentum trading. That, after all, is how George Soros makes much of his money.