Some arguments against EMH
Rationality does not apply to all investors. In fact many of them are irrational. For example, rational investors minimize tax payments by selling losers and holding onto winners. However, according to Brad Barber and Terrance Odean's 1999 paper, many are doing the opposite.
Independent Deviations from rationality may not hold in the real market as well. Supporters of behaviourial finance base the arguments on two principles from psychology. The first one is representativeness which says that people tend to draw conclusions from insufficient data. An implication in finance is bubbles resulted from markets dominated by representativeness, the internet stocks or the US housing market for example. Another principle is conservatism which says that people are slow to adjust their beliefs to new information. Indeed, many studies suggest stock prices seem to adjust slowly to the information contained in earning announcement. If there are some universal rules which determine how people deviate from rationality, then it is very likely that the deviations are not random.
Lastly, markets may stay irrational longer than an investor could stay solvent. If the positions from amateurs are large, professionals may have to take huge risk to correct the price.
Empirical challenges to market efficiency
Deviation from parity
Royal Dutch petroleum and shell transport merger
3Com and Palm Inc
etc.
Kolasinski and Li's study on earnings surprise
Stocks with high book value to stock price ratio outperfom stocks with low ratios (Fama and French 1998 paper)
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