I have done a bit more digging on this Adaptive Market Hypothesis, touted as replacement for the Efficient Market Hypothesis. The first paper was published in 2004. It has only received 4 citations and only 1 paper in 2009 was directly relevant to it, albeit supporting the AMH model. In other words, hardly anyone reads it. It's not a very impressive track record.
I have skimmed through the original 2005 paper and it presents an alternative model to EMH using some aspects from behaviorial economics. However, he does not make any bold claims that his active management strategy will outperform passive methods. In fact he doesn't propose any active strategy for investing. Reading his abstract:
I begin with a brief review of the classical version of the EMH, and then summarize the most signicant criticisms levelled against it by psychologists and behavioral economists. I argue that the sources of this controversy can be traced back to the very origins of modern neoclassical economics, and by considering the sociology and cultural history of modernance, we can develop a better understanding of how we arrived at the current crossroads or the EMH. I then turn to the AMH, in which the dynamics of evolution|competition,mutation, reproduction, and natural selection|determine the effciency of markets and the waxing and waning of nancial institutions, investment products, and ultimately, institutional and individual fortunes. I conclude by considering some surprisingly sharp implications of the AMH for portfolio management, and by outlining an ambitious research agenda for formalizing several aspects of this rather unorthodox alternative to the classical EMH.
In other words, the author himself has admitted this is a very new model and he is going to spend the next 5-10 years developing and refining it.
What this means for the retail investor, is that we are years away before a viable active management strategy that uses the anomalies identified by AMH can be launched (assuming that it ever gets acceptance by the wider community). The most open-minded option would be to wait for another 5-10 years to see if it develops into something more concrete. For people like me, I would not be bothered. If it becomes big, I would hear about it... and then maybe then I will read up more.
In another form of his paper:
http://web.mit.edu/alo/www/Papers/JIC2005_Final.pdf
I'll pick up some illustrative quotes from the author:
1)
Although the AMH is still primarily a qualitative and descriptive framework, it yields some surprisingly concrete insights when applied to practical settings such as asset allocation, risk management, and investment consulting. - This means that we cannot use the AMH model yet to develop an active strategy that will consistently outperform. What AMH provides is an alternative to the EMH... and that's it.
2)
The new paradigm of the AMH is still in its infancy and certainly requires a great deal more research before it becomes a viable alternative to the EMH. - Actually, the AMH model still needs to be worked on before it can replace the EMH.
So in conclusion, ASSUMING that the AMH model is valid, it only provides that there may be a way to systematically take advantage of the inefficiencies of the market in a consistent manner that would allow us to outperform passive index investing. However, given that the AMH model is just a proposal and not rigorously proven... and even if it was it is still a qualitative and not quantitative model... there is no way in the near future to take advantage of this finding for the benefit of investors.
GET IT??? In other words your behavioral finance active management strategy does not exist yet. Check back in another 10+ years and maybe things will be different...
