Abstract
PurposeAre the capital markets of leading industrialized nations rational and efficient? This powerful hypothesis was badly dented by the work of De Bondt and Thaler (1985) on stock market overreaction and by subsequent research on momentum and reversals in prices and earnings.Design/methodology/approachHuman psychology, at times predictably irrational, drives the markets. This paper investigates this issue.FindingsThe author reviews the origins of the idea of overreaction, how behavioral insights modify standard asset pricing theory and how they contribute to our understanding of the world of finance.Originality/valueThe paper reveals the origins of the idea of overreaction, how behavioral insights modify standard asset pricing theory and how they contribute to our understanding of the world of finance.
Subject
Strategy and Management,Finance,Accounting
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