The push for financial regulatory reform has highlighted an important debate surrounding the Efficient Markets Hypothesis, 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.

Initially confined to academia, the battle between EMH disciples and behaviouralists has spilled over to central bankers, regulators and politicians, and the new regulatory lands- cape may depend on the outcome of this conflict. The strong convictions fuelling this debate have created a false dichotomy between the two schools of thought – in fact, both perspectives contain elements of truth, but neither is a complete picture of economic reality. Markets do function quite efficiently most of the time, aggregating vast amounts of disparate information into a single number – the price – on the basis of which millions of decisions are made. This feature of capitalism is an example of Surowiecki's “wisdom of crowds”. But every so often, markets can break down, and the wisdom of crowds can become the “madness of mobs”.