Anchoring Bias and Value Strategy
41 Pages Posted: 24 Apr 2011 Last revised: 29 May 2012
Date Written: May 29, 2012
Value strategies purchase stocks that have high fundamental values relative to prices. The interpretation of why value strategies outperform is controversial. Based on the fact that investors may rely too heavily, or “anchor,” on one piece of information when making investment decisions, this study shows that value strategies can yield higher returns by exploiting anchoring bias, and that the risk premium is also tripled. The returns cannot be rationalized with a variety of factor models. Overall, this study confirms the predictability of stock expected returns based on fundamental values relative to prices in the context of investor behavior.
Keywords: Anchoring bias, Earnings-price ratio, Value strategy
JEL Classification: G11, G14
Suggested Citation: Suggested Citation