The concept of overreaction and underreaction in market movements from "summary" of Beyond Greed and Fear:Understanding Behavioral Finance and the Psychology of Investing by Hersh Shefrin
In the world of investing, market movements are often driven by the collective actions of investors. However, these movements are not always rational or efficient. In fact, they can be influenced by psychological biases that cause investors to overreact or underreact to new information. Overreaction occurs when investors react too strongly to new information, causing prices to move beyond what is justified by the fundamentals. This can lead to price bubbles and subsequent crashes as investors realize they have overvalued certain assets. On the other hand, underreaction happens when investors fail to fully incorporate new information into their decision-making process. This can result in prices taking lon...
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