Financial Markets are Not Efficient: Financial Literacy as an Effective Risk Management Tool

Abstract

This paper advances the view that the deep confidence of market regulators in the assumptions and premises of the Efficient Market Hypothesis (EMH) has led to the underestimation of market risks, thus inactivating the market education of existing and future investors. Hence, they have not responded to financial illiteracy, which exacerbated the recent financial crisis. Investor education may be considered as a systemic risk management tool for future financial crises and, especially, financial literacy can drive a wedge between the regulation and the prevention of severe financial crises based on expected benefits versus losses. This also will help to regain investors’ trust in the market after the crisis and instill investors with more confidence. This approach has not yet received the attention it deserves.