The push for financial regulatory reform has highlighted an important debate surrounding the Efficient Markets Hypothesis (EMH), the idea that market prices are rationally determined and fully reflect all available information. If true, the EMH implies that regulation is largely unnecessary because markets allocate resources and risks efficiently via the “Invisible Hand”.

However, critics of the EMH argue that human behaviour is hardly rational, but is driven by “animal spirits” that generate market bubbles and busts, and regulation is essential for reining in misbehaviour.