Investor Psychology and Security Market Under- and Overreactions
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What they found
This model explains the same momentum-then-reversal pattern using overconfidence and self-attribution bias. Overconfident investors overweight their private signals, pushing prices past fundamental value; when public information confirms them they become more confident (self-attribution), extending the overreaction, and when it contradicts them they discount it. Prices therefore continue to drift in the direction of the initial private signal before eventually correcting. The model also predicts that price moves accompanied by public events are more likely to be permanent than moves without them.
What you can use
- Overconfidence in your own analysis, reinforced by taking credit for wins and blaming losses on bad luck, is a documented mechanism for overreaction.
- Moves triggered by public information tend to stick; moves without identifiable news are more likely to reverse.
- The self-attribution bias means winning streaks make traders more overconfident, which is exactly when they overtrade.
Caveats
Theoretical model; the specific biases are hard to measure directly. Companion to the Barberis-Shleifer-Vishny model with a different mechanism.
Tags: behavioral, overconfidence, self-attribution, theory
Summaries are our own reading of the paper, not the authors' words. Educational only, not advice. Discuss it in Book Club.