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The crazy thing about the efficient market theory is that so many rational people believed — as many still do — that markets are perfectly rational. Since markets are the venues where human beings conduct transactions, it would seem more rational to assume that markets are rational much of the time and irrational and emotional the rest of the time, just like the humans who are market participants.

I point to irrationality and emotion because they probably do more to explain the sizable losses and dramatic price swings of this miserable January than cold, hard reason. In fact, emotional swings between ebullience and pessimism probably explain more about market movements than all the sophisticated models the rocket scientists on Wall Street can construct.

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