Presentation Slides for 'Investor Psychology and Security Market Under and Overreactions'
42 Pages Posted: 31 May 2018
Date Written: December 1998
We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations (momentum), short-run earnings drift, but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy.
Prepublication version available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2017
Keywords: investor psychology, overconfidence, behavioral finance, overreactions, underreactions, asset pricing, anomalies, return predictability
JEL Classification: D81, D82
Suggested Citation: Suggested Citation