Normative implications of equilibrium models: Homogeneous expectations and other artificialities

A new round in an ongoing discussion about the usefulness and validity of the Capital Asset Pricing Model (CAPM) began with an academic paper by Fama and French. The tumult is not just the result of opposing ideas, but is also about conflicting professional and economic interests. The disagreements often obscured by academic rhetoric, are really about normative applications of positive theories in general, and about the normative implications of equilibrium-restricted β statistics in particular. The purpose of this paper is to show where the line of demarcation between positive and normative issues should be drawn in this debate.