Utilizing Neo-Classical Equilibrium Properties, CAPM Explains Pricing on Idealized Capital Markets

In general, an equilibrium theory only has the power to explain a rigid, irrevocable state and is useless to indicate rational resource allocation in a dynamic economy (Herbener 1996, 160; Mises [1949] 1998, 708–9; Morgenstern 1935, 353). As a result, finding an application in a dynamic reality is unlikely. CAPM [Capital Asset Pricing Model] is an equilibrium model that explains pricing in the capital market under idealized assumptions. The application of such restrictive constraints should be carefully considered, especially for the sensitive purpose of calculating a decision value. Caution is advised by neo-classical luminaries. While the CAPM builds on the assumptions of the efficient market hypothesis, which was introduced by Fama (1970, 1965), Fama and French (2004, 43–4) later refute CAPM’s practical applicability and warn of its “seductive simplicity.”

—Michael Olbrich, Tobias Quill, and David J. Rapp, “Business Valuation Inspired by the Austrian School,” Journal of Business Valuation and Economic Loss Analysis 10, no. 1 (2015): 12.