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Purpose Are 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/approach Human psychology, at times predictably irrational, drives the markets. This paper investigates this issue. Findings The 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/value The 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.
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Werner De Bondt (2020) studied this question.
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