Bubble Investors: What Were They Thinking?

Abstract:     
Abstract: A variety of models have been proposed to explain the rise and
fall of stocks prices in the U.S. around the turn of the millennium. Many
models focus on behavioral explanations in which and investor beliefs
about their own capabilities and the efficiency of market prices play a role. In this paper we provide empirical evidence on these beliefs.

We surveyed a large sample of investors who bought stock in a telecommunications company at least once in the 1999-2000 period. We solicited their views on the efficiency of the stock market, and the basis for their personal trading decisions. A significant fraction appear to hold beliefs inconsistent with various implications of the efficient market hypothesis. Their motives for trade are based upon a belief in the value of fundamental research and a belief in the importance of past price trends. These investors on average believe that markets over-react to news announcements. Many admitted to buying stocks they believed at the time to be over-valued, but claimed to have done so on the anticipation that the share prices would continue to rise.

JEL Classifications: G11

Working Paper Series