EFF: The people in behavioral finance treat the Shleifer and Vishny (1997) paper as if it is empirical evidence. In fact, it is theory built on a set of assumptions - in the end, a clever set of claims. It can't discredit market efficiency until it is supported by rigorous empirical work. We are still waiting.

KRF: I am swayed more than Gene by the empirical work. I think there are many papers that show the limits of arbitrage framework can help us understand the behavior of financial prices. The papers I like include Lamont and Thaler (Journal of Political Economy, 2003), Mitchell, Pedersen, and Pulvino (American Economic Review, 2007), and Mitchell, Pulvino, and Stafford (Journal of Finance, 2002). Mitchell and Pulvino's most recent working paper, "Arbitrage Crashes and the Speed of Capital," is particularly interesting. The best evidence on the limits of arbitrage is from periods of stress, such as the crash of 1987, the market run-up and collapse of 1998-2001, and the financial crisis of 2007-2008. It makes sense to me that the same forces are also at work, but perhaps less important, in calmer periods.

Although the limits of arbitrage argument is based on the premise that prices do not fully reflect all publicly available information, it also says that mistakes in prices do not imply easy profits. In fact, I think the argument implies that almost all investors should act as if prices are right.