Does the Stock Market Overreact?
1985/07/01 by WERNER F. M. De BONDT, Werner F. M. De Bondt, Richard H. Thaler +1 · 7,266 citations
Decision Sciences · Economics, Econometrics and Finance · #Biology #Decision-Making and Behavioral Economics #Econometrics #Economics #Efficient-market hypothesis #Empirical evidence #Financial Markets and Investment Strategies #Financial economics #Geography #Market Dynamics and Volatility #Market efficiency #Monetary economics #Portfolio #Stock (firearms) #Stock market
paper · doi:10.1111/j.1540-6261.1985.tb05004.x
published in The Journal of Finance 40(3), 793-805 (Wiley)
openalex publication_date 1985/07/01 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05
Abstract
ABSTRACT Research in experimental psychology suggests that, in violation of Bayes' rule, most people tend to “overreact” to unexpected and dramatic news events. This study of market efficiency investigates whether such behavior affects stock prices. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. Substantial weak form market inefficiencies are discovered. The results also shed new light on the January returns earned by prior “winners” and “losers.” Portfolios of losers experience exceptionally large January returns as late as five years after portfolio formation.
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