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Science Forum Index » Cognitive Science Forum » Underreaction / overreaction in market psychology
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Message |
| PGreenfinch |
 Posted: Fri Dec 12, 2003 3:00 am |
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Guest
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Usually investors *under-react* (too small price changes)
to news / events that signal a change of prospects for the
whole market or for a given stock. Sometimes there is no
reaction at all (delayed reaction) with a period of lag /
latency with no price (or price trend) changes.
The reasons why *weak signals* are often neglected are
various: anchoring, lack of attention, cognitive dissonance,
conservatism, peer pressure (fear of being wrong alone),
simple prudence waiting for confirmation, lack of
appropriate knowledge to appreciate the relevance of
the new information, cost of getting good information
(a thing that can make professionals able to understand
new phenomena and take advantage of them before
the general public), and so on.
Later on, the information / attitude diffuses and a gradual
*adjustment* takes place until the stock reaches its
fundamental value
In the end, when the cascade of news and of market
reactions confirms fully the change, investors, and above
all non professionals (although many professionals are not
immune) tend to *over-react* Sometimes to the point that
people thinks that the detected change has become the
new paradigm valid for all eternity. They find totally new
"scientific" explanations to find rationality in the irrational.
The whole chain, underreaction followed by gradual
adjustment and then overreaction is considered the main
cause of *market trends / momentum* and *underpricings /
overpricings*.
=> You can find 400+ other definitions about market
psychology in our behavioral finance group's
glossary / faq at:
--------------------------------------
The free behavioral finance gallery:
http://perso.wanadoo.fr/pgreenfinch/behavioral-finance.htm |
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