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Investor psychology and security market under- and overreactions (1998)
| Venue: | Journal of Finance |
| Citations: | 698 - 43 self |
BibTeX
@ARTICLE{Daniel98investorpsychology,
author = {Kent Daniel and David Hirshleifer},
title = {Investor psychology and security market under- and overreactions},
journal = {Journal of Finance},
year = {1998},
pages = {1839--1885}
}
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Abstract
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 autocorrela-tions ~“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 fi-nancial policy. IN RECENT YEARS A BODY OF evidence on security returns has presented a sharp challenge to the traditional view that securities are rationally priced to re-f lect all publicly available information. Some of the more pervasive anoma-
Keyphrases
security market investor psychology private information managerial action recent year body evidence stock mispricing corporate fi-nancial policy investor overconfidence accounting performance public-event-based return predictability pervasive anoma negative correlation future return overconfidence implies negative long-lag autocorrelations several untested implication short-run earnings drift security return available information investor confidence long-term past stock market investment outcome sharp challenge traditional view well-known psychological bias excess volatility re-f lect positive short-lag autocorrela-tions momentum asymmetric shift
