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De Bondt, W. F. M., & Thaler, R. H. (). Does the stock market overreact. Journal of finance, 40, Werner F M De Bondt and Richard Thaler · Journal of Finance, , vol. link: :bla:jfinan:vyip Behavioral finance theorists Werner De Bondt and Richard Thaler released a study in the Journal of Finance called “Does the Market Overreact?” In their .

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Finally, the choice of December as the “portfolio formation month” and, therefore, of January as the “starting month” is essentially arbitrary. To reiterate, the previous findings are broadlyconsistent with the predictions of the overreactionhypothesis.

Instead, we will concentrate on an empiricaltest of the overreaction hypothesis. But, if the effect under study can be shown to apply to them, the results are, if anything, more interesting.

For, even if we knew the “correct” model of Em Rjt IFm it would explain only small part of the variation l1in Pit. One class,of tasks which have a well-established norm are probability revision problemsfor which Bayes’ rule prescribesthe correctreactionto new information. The effect of multiplying the numberof replications is to remove part of the random noise. De Bondt and Richard Thaler Source: Handbook of the Economics of Finance 1, thaller, The system can’t perform the operation now.

Secondly,if prices “rebound” Tha,er, why is that effect so much larger in magnitude than the selling pressure 1895 “caused”it during the final months of the previous year? Therefore, the empirical analysis is based on three types of return residuals: While we are highly sensitive to these issues, we do not have the space to address them here.

As the cumulative average residuals during the formation period for various sets of winner thalef loser portfolios grow larger, so do the subsequent price reversals, measured by [ACARL,t – ACARw,] and the accompanying t-statistics. Constitutional Political Economy 19 4, They conclude that the existence of some rational agents is not sufficient to guarantee a rational expectations equilibrium in an economy with some of what they call quasi-rationalagents.

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The formation month for these portfolios is the month of Decemher debont all uneven years hetween and It has now been well-established that Bayes’ rule is not an apt characterization of how individuals actually respond to new data Kahneman et al. Reinganum [21] has claimed that the small firm effect dfbondt the PIE effect and that both are related to the same set of missing and againunknown factors.

An Applicationto the Size Effect. Table I confirms the prediction of the overreaction hypothesis. The PIE ratio is presumed to be a proxy for some omitted factor which, if included in the “correct”equilibrium valuation model, would eliminate the anomaly. There is also considerable evidence that the actual expectations of professionalsecurity analysts and economic forecastersdisplay the same overreactionbias for a review, see De Bondt [7].

What is an appropriatereaction? Journal of Economic perspectives 5 1, Fairness as a constraint on profit seeking: Length of the Formation Period and No.

Richard Thaler – Google Scholar Citations

In particular,it counters the predictablecritiquethat the overreactioneffect may be mostly a small-firm phenomenon. More recently, Arrowhas concludedthat the work of Kahneman and Tversky “typifies very precisely the exessive reaction to current information which 11985 to characterize all the securities and futures markets” [1, p. Conclusions Research in experimental psychology has suggested that, in violation of Bayes’ rule, most people “overreact”to unexpected and dramatic news events. Clearly,the successive 46 yearly selections are not independent.

Secondly, consistent with previous work on the turn-of-the-year effect and seasonality, most of the excess returns are realized in January.


Relevant t-statistics can be found for each of the 36 postformation months but they do not represent independent evidence. For a formation tjaler as short as one year, no reversal is observed at all.

First, the overreaction effect is asymmetric;it is much larger for losers than for winners. Explanations are usually based on alleged misspecificationof the capital asset pricing model CAPM. The term overreaction carries with it an implicit comparison to some degree of reaction that is consideredto be appropriate. Specifically, two hypotheses are suggested: If no such quote thaled availablebecause the stockholdersreceive nothing for their shares, the return is entered as minus one.

Werner De Bondt

Articles 1—20 Show more. Does the Stock Market Overreact? Mental accounting and consumer choice R Thaler Marketing science 4 3, We use information technology and tools to increase productivity and facilitate new forms of scholarship.

However,Basu [4] found a significant PIE effect after controlling for firm size, and earlier Graham [11] even found an effect within the thirty Dow Jones Industrials,hardly a group of small firms! The step is repeated 16 times for all nonoverlappingthreeyear periods between January and December As a final precaution, he also characterizes the securities in the extreme portfolios in terms of a number of financial variables.

Cambridge University Press, This study was undertakento investigate the possibility that these phenomena are related by more than just appearance.