Accounting Theory and Practice

Journal of Economic Perspectives—Volume 17, Number 4 —Fall 2003—Pages 191–202

Anomalies The Law of One Price in Financial Markets

Owen A. Lamont and Richard H. Thaler

Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that rational agents with stable, well-de ned preferences interact in markets that (eventually) clear. An empirical result quali es as an anomaly if it is dif cult to rationalize or if implausible assumptions are necessary to explain it within the paradigm. Suggestions for future topics should be sent to Richard Thaler, c/o Journal of Economic Perspectives, Graduate School of Business, University of Chicago, Chicago, IL 60637, or ^richard.thaler@gsb.uchicago.edu&.

Introduction

It is good for a scienti c enterprise, as well as for a society, to have wellestablished laws. Physics has excellent laws, such as the law of gravity. What does economics have? The rst law of economics is clearly the law of supply and demand, and a ne law it is. We would nominate as the second law “the law of one price,” hereafter simply the Law. The Law states that identical goods must have identical prices. For example, an ounce of gold should have the same price (expressed in U.S. dollars) in London as it does in Zurich, otherwise gold would ow from one city to the other. Economic theory teaches us to expect the Law to hold exactly in competitive markets with no transactions costs and no barriers to trade, but in practice, details about market institutions are important in determining whether violations of the Law can occur.

y Owen A. Lamont is Visiting Professor of Finance at Yale School of Management, New

Haven, Connecticut. Richard H. Thaler is Robert P. Gwinn Professor of Behavioral Science and Economics, Graduate School of Business, University of Chicago, Chicago, Illinois.

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Journal of Economic Perspectives

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