We present a comparative analysis of two sets of competing theories of financial anomalies: (1) “behavioral ” theories relying on investor irrationality; and (2) rational “structural uncertainty” theories where investors have incomplete information about the economic environment. Each set of theories deviates from the rational expectations ideal, relaxing one, but not the other, of its two major assumptions. Despite their differing theoretical foundations, the two sets of theories share remarkable mathematical and predictive similarities and differ mainly in the labels they attach to similar modeling techniques and in the interpretations they give to resulting predictions. Their similarity leaves the theories virtually indistinguishable empirically, even as their normative implications differ significantly. This similarity, however, may point to deeper and overlooked connections between investor irrationality and rational structural uncertainty. We illustrate our ideas by examining competing theories of IPO underperformance
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