Proven scientific views of the world are called theories. For example, all of us know that gravity is true, yet it is categorized as a theory. In contrast to proven theories, new ideas that may or may not be true are labeled hypotheses. Importantly, even those who defend market rationality label their idea as only a hypothesis, acknowledging that it has not been proven.

In fact, the belief in market efficiency might not even qualify for hypothesis status. The great philosopher of science, Sir Karl Popper, writes, In so far as a scientific statement speaks about reality, it must be falsifiable; and in so far as it is not falsifiable, it does not speak about reality. 20

In order to reach the standard of hypothesis, an idea must be provable, which means that there must potentially be evidence that could disprove it. As we have seen, there is essentially no way to disprove the idea of efficient markets. Popper excludes unfalsifiable ideas as being outside of science, mere dogma.

Double, double toil and trouble; Fire burn, and cauldron bubble, say the witches in Macbeth, associating bubbles with troubles. However, these same witches also note that in some situations foul is fair and fair is foul. When someone sells a house to buy a ridiculously expensive tulip bulb, for example, another person gets to buy a house for the rock-bottom price of one tulip bulb.

Investors who accept the dogma of market efficiency give up the opportunities that exist precisely because markets are irrational. Such surrender might be merited if the idea of market efficiency was a proven theory, but it is at best a hypothesis, and at worst a nonscientific assertion.

Why Professors Fly Coach and Speculators Own Jets

I have made my living from market inefficiency, so the financier Alfred Checchi told me during a visit to my Harvard Business School classroom.

In contrast, most of the professors at the Harvard Business School are believers in market efficiency, and one told me (with apparent sincerity) that technology stocks were not overpriced in 2000.

Although Mr. Checchi is frequently invited to visit the Harvard Business School, he is so offended by the assumption of market efficiency that he refuses to attend finance classes. (Similarly, the Nobel Prize-winning economist Professor Ronald Coase told me that his only objection to the idea of bounded rationality is that the word rational should not be used in any sentence describing human behavior.)

So who has been more successful in finding market opportunity, efficiency-preaching professors or irrationality-exploiting financiers? Alfred Checchi was able to spend $30 million of his own money on a run for governor in California. Furthermore, while professors usually fly on commercial airlines, Alfred Checchis success not only provided him with enough money to buy a private jet, it even allowed him to buy a substantial stake in Northwest Airlines.

The lesson is that those who seek profit should stop looking for absolute proof that markets are not efficient. Such proof is not possible. In contrast, those who seek superior performance should, like Mr. Chec-chi, accept market irrationality as the first step toward profit.

Furthermore, Mr. Checchi shows that crazy markets dont have to be mean. They can, in fact, be very nice. The key is to be on the right side of irrationality-to sell at high prices and buy at low prices.

Sell the Fads, Buy the Outcasts

Opportunities occur periodically in many different markets. In all cases, winning requires a willingness to challenge the conventional wisdom. During the inflationary 1970s, Andrew Tobias, the personal finance guru, literally had to deal with a mob in order to profit from an irrationally high silver price.21

Throughout the inflationary 1970s the price of silver rose by more

than 1,000% until it exceeded $40 an ounce. At the height of the frenzy, Tobias decided to sell some of his physical silver. He went to a retail location that bought and sold precious metals including silver and gold. As he approached the store he saw a huge crowd and thought it was too late. Everyone, he supposed, had realized that the price of silver was too high and had gathered to sell.

When Tobias reached the store he discovered to his delight that the crowd was gathering to buy! Soon afterwards, silver prices plummeted and more than 20 years later silver still sells for under $10 an ounce. Similarly, in 1970s gold prices soared toward $900 ounce before crashing, and today it sells for less than half that price.

In the late 1970s precious metals were the investment craze, and they were terrible investments. In order to profit, Tobias had to lean into the prevailing opinion by selling while all of those around him were buying.

Usually the mob is not physically present, but rather represented in the prevailing views of the knowledgeable. In 2000, I began dating Barbara. As a joke, I told Barbara that we would have enough money to get married and have a baby if the stock price of EMC fell from $100 to below $50 (I was betting against EMCs stock price by shorting the shares).

Barbara is an archeologist and before this baby challenge she had never paid any attention to financial media. Now she began to listen, and the more she learned about EMC, the more she worried. Every single mention of the stock, in every venue, detailed the virtues of the EMC and predicted that the shares would continue to rise. Wall Street analysts and mutual fund managers appeared on TV and described how EMCs markets were growing and the stock was a no-brainer, and a must own.

Under the deluge of praise, Barbara asked me what I knew that these pundits did not. Did I think EMC had bad products? No. Did I have some inside information that EMC sales were bad? No. Did I know of competitors that would steal EMCs customers? No. Well, she demanded, what did I know? I told Barbara that I knew all the analysts and mutual fund managers loved EMC and that was enough. Barbara responded with