Markets are not perfectly efficient. More or less everyone agrees to this in the wake of the financial crisis. And while asset bubbles have recurred from time to time throughout history, bubble production has accelerated sharply.

So not only are markets inefficient, but they are more inefficient than they used to be. This is despite rapid technological improvement to make markets faster and more liquid. So why are markets inefficient, and what can be done about it?

The most popular answer is to blame human nature. Behavioural economists, applying experimental psychology, have explained many market anomalies. But human nature is constant. Greed and fear have been around forever. It is hard to blame an intensifying problem in the markets on any increased level of greed.

Paul Woolley of the London School of Economics thinks he is on his way to a new answer. On his reading, the problem is lodged in the division between principals and agents. Most money is placed in markets by agents acting for the owners, not by the owners themselves. Agents – fund managers of one kind or another – have their own incentives which can differ from those of their principals, and they also have more information. The interactions of principals with agents, in the form of fund flows in and out of the big institutions, drive markets. Importantly, this is more the case than it used to be.

Why are markets inefficient and what can be done about it? - FT.com