Question

Based on the two passages below, match the following claims made by the author of Passage A (Left) to how the author of Passage B would most likely evaluate or respond to them (Right).

Passage A
The efficient market hypothesis (EMH) posits that financial markets process information with remarkable accuracy, such that asset prices continually reflect all available information. Critics increasingly point to psychological biases observed in laboratory settings—such as overconfidence or loss aversion—as evidence that individuals act irrationally. However, these individual idiosyncrasies do not necessarily translate to market-wide inefficiencies. In a liquid market, any significant deviation of an asset's price from its fundamental value creates an arbitrage opportunity. Rational, sophisticated investors will immediately exploit this mispricing, buying undervalued assets and selling overvalued ones. This mechanism drives prices back to equilibrium rapidly. Thus, while human psychology is undeniably complex and imperfect, the competitive structure of the market aggregates diverse behaviors into rational pricing. Anomalies, when they occur, are transient blips rather than structural failures. Models of market efficiency do not claim that every actor is perfectly rational at every moment, but rather that the market as an aggregate behaves as if they were. Attempting to regulate markets based on behavioral anomalies is therefore misguided; it risks stifling the very arbitrage mechanisms that ensure efficiency, introducing regulatory frictions that are far more damaging than temporary price deviations.

Passage B
Traditional financial theory relies heavily on the assumption of frictionless arbitrage, suggesting that 'smart money' will always correct the errors of irrational market participants. Yet, this theoretical construct ignores the practical limits to arbitrage. In reality, exploiting mispricing is inherently risky and costly. The noise trader approach to finance demonstrates that irrational investors, or 'noise traders,' can act in concert based on shared sentiment, driving prices further away from fundamental values. A rational arbitrageur attempting to correct this must have a long time horizon and deep pockets, as the mispricing could worsen before it corrects—a phenomenon famously summarized by the adage that markets can remain irrational longer than you can remain solvent. Consequently, behavioral biases are not merely individual quirks that wash out in the aggregate; they are systemic factors that can lead to persistent, substantial price distortions in real-world markets. Furthermore, the institutional structures of modern finance often exacerbate these limits. Fund managers, evaluated on short-term performance, are understandably reluctant to take contrarian positions against strong market trends, even if they recognize a bubble. This institutional herd behavior means that smart money often joins the noise traders rather than countering them. Thus, recognizing the persistent impact of behavioral factors is essential not just for academic modeling, but for regulators seeking to mitigate systemic financial vulnerabilities.