B y now, the fallout from the epic financial crisis is both familiar and tangible: foreclosed mortgages, failed banks, lost jobs, recession. On the less tangible side, the meltdown also shook faith in a widely accepted economic principle: Markets are efficient. Since the mid-1960s, many academics have embraced the theory that prices paid in large public markets, such as those in stocks and bonds, reflect the collective wisdom of investors acting rationally on all available information. Yet there’s been growing recognition during the past 15 to 20 years that human psychology — including irrationality — can play havoc with the wisdom of crowds. The historic bursting of the real estate and financial bubbles further undermined the belief that investors and markets behave with machine-like perfection.The crisis also gave new relevance to the work of Charles M.C. Lee, who joined the Stanford Graduate School of Business as a full-time faculty member in July 2009. The professor of accounting has been at the forefront of the debate about market efficiency for nearly two decades. He was an early believer in the relevance of human behavioral patterns to market dynamics. Lee is among the pioneers in developing computer-based strategies for stock selection that take into account behavioral factors such as the tendency for investors to be overconfident or to ignore statistical likelihoods. The techniques he developed for valuing companies and predicting stock price movements help investors systematically evaluate and trade equities by taking advantage of market mispricings.

Forbes India – Charles Lee on Beating the Crowd at Picking Stocks