Theorizing Efficient Markets: A Sociology of Financial Ideas
In this paper, I use the case of financial economics to show how an innovative idea can shape a research agenda. I focus on why the efficient-market hypothesis, crystallized in Eugene Fama’s research, acquired core theoretical status in the discipline of financial economics, whereas the Capital Asset Pricing Model, championed by, among others, Fischer Black, did not. I draw attention both to differences in the networks propagating these models, in particular differences in cohesion and coherence, and to differences in the methodologies underlying the models. I argue that Fama’s use of “data-dredging” techniques and frequentist statistics increased the coherence of the intellectual circle around him, turning the analysis of efficiency into a collective project oriented towards the discovery of objective properties. By contrast, Black’s adoption of more subjectivist methods exacerbated the individualistic tendencies of his approach and his network, increasing the incoherence of his research group.