An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead him, to follow behavior preceding individual without regard his own information. We argue that localized conformity and fragility mass behaviors can be explained by cascades.

ABSTRACT We propose a theory of securities market under‐ and overreactions based on two well‐known psychological biases: investor overconfidence about the precision private information; biased self‐attribution, which causes asymmetric shifts in investors' confidence as function their investment outcomes. show that implies negative long‐lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public‐event‐based return predictability. Biased...

The basic paradigm of asset pricing is in vibrant flux. purely rational approach being subsumed by a broader based upon the psychology investors. In this approach, security expected returns are determined both risk and misvaluation. This survey sketches framework for understanding decision biases, evaluates priori arguments capital market evidence bearing on importance investor prices, reviews recent models.

Learning by observing the past decisions of others can help explain some otherwise puzzling phenomena about human behavior. For example, why do people tend to converge on similar behavior? Why is mass behavior prone error and fads? The authors argue that theory observational learning, particularly informational cascades, has much offer economics, business strategy, political science, study criminal

Abstract Psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood. This paper examines the relationship between morning sunshine in city of a country's leading stock exchange daily market index returns across 26 countries from 1982 to 1997. Sunshine strongly significantly correlated returns. After controlling for sunshine, rain snow are unrelated Substantial use weather‐based strategies was optimal trader very low transactions costs. However,...

ABSTRACT Previous empirical work on adverse consequences of CEO overconfidence raises the question why firms hire overconfident managers. Theoretical research suggests a reason: can benefit shareholders by increasing investment in risky projects. Using options‐ and press‐based proxies for overconfidence, we find that over 1993–2003 period, with CEOs have greater return volatility, invest more innovation, obtain patents patent citations, achieve innovative success given development...

ABSTRACT Recent studies propose that limited investor attention causes market underreactions. This paper directly tests this explanation by measuring the information load faced investors. The distraction hypothesis holds extraneous news inhibits reactions to relevant news. We find immediate price and volume reaction a firm's earnings surprise is much weaker, post‐announcement drift stronger, when greater number of same‐day announcements are made other firms. evaluate economic importance...

This paper offers a model in which asset prices reflect both covariance risk and misperceptions of firms' prospects, arbitrageurs trade against mispricing. In equilibrium, expected returns are linearly related to mispricing measures (e.g., fundamental/price ratios). With many securities, idiosyncratic value components diminishes but systematic does not. The theory untested empirical implications about volume, volatility, ratios, mean returns, is consistent with several findings. These...

ABSTRACT This paper uses pre‐offer market valuations to evaluate the misvaluation and Q theories of takeovers. Bidder target (price‐to‐book, or price‐to‐residual‐income‐model‐value) are related means payment, mode acquisition, premia, hostility, offer success, bidder announcement‐period returns. The evidence is broadly consistent with both hypotheses. for hypothesis stronger in pre‐1990 period than 1990–2000 period, whereas period.

ABSTRACT In existing models of information acquisition, all informed investors receive their at the same time. This article analyzes trading behavior and equilibrium acquisition when some common private before others. The model implies that, under conditions, will focus only on a subset securities (“herding”), while neglecting other with identical exogenous characteristics. addition, is consistent empirical correlations that are suggestive oft‐cited strategies such as profit taking...

We show that the incentive for managers to build their reputations distorts firms' investment policies in favor of relatively safe projects, thereby aligning managers' interests with those bondholders, even though are hired and fired by shareholders. This effect opposes familiar agency problem risky debt is imperfectly covenant-protected, wherein shareholders tempted excessively projects order expropriate bondholders. Consequently, when managerial concern reputation results conservatism, it...

We provide a model in which single psychological constraint, limited attention, explains both under- and overreaction to different earnings components. Investor neglect of induces post-earnings announcement drift the profit anomaly. Neglect components causes accrual cash flow anomalies. The offers empirical implications relating strength earnings-related anomalies forecasting power current information for future earnings, investor attentiveness, volatilities correlation between accruals...

Abstract We propose a theoretically motivated factor model based on investor psychology and assess its ability to explain the cross-section of U.S. equity returns. Our augments market with two factors that capture long- short-horizon mispricing. The long-horizon exploits information in managers’ decisions issue or repurchase response persistent earnings surprise factor, which is by inattention evidence underreaction, captures anomalies. This 3-factor risk-and-behavioral outperforms other...

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here sources judgment and decision biases, how they affect trading market prices, role arbitrage flows wealth between more rational less investors, firms exploit inefficient prices incite misvaluation, effects managerial There is need for theory testing feelings financial decisions aggregate outcomes. Especially, time has come move beyond behavioral social which...

Trading costs, in the form either of explicit charges or costs becoming informed, limit participation some classes traders commodity future markets. When speculators face a fixed cost participating futures market that is used by producers to hedge their stochastic revenues, risk premium deviates from perfect prediction. The deviation rises absolute value with square root trading and standard residual returns, it unrelated covariance price producers' nonmarketable wealths. residual-risk...

We examine how investor preferences and beliefs affect trading in relation to past gains losses. The probability of selling as a function profit is V-shaped; at short holding periods, investors are more likely sell big losers than small ones. There little evidence an upward jump zero profits. These findings provide no clear indication that realization preference explains trading. Furthermore, the disposition effect not driven by simple direct for stock virtue having gain versus loss. Trading...

The last several decades have witnessed a shift away from fully rational paradigm of financial markets toward one in which investor behavior is influenced by psychological biases. Two principal factors contributed to this evolution: body evidence showing how bias affects the economic actors; and an accumulation that hard reconcile with models security market trading volumes returns. In particular, asset exhibit are high, individuals managers aggressively, even when such results high risk low...