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Qeustion II: Underreaction and Overreaction. We discussed a model of investor sentiment in class (lectures on Jun 2 and Jun 8). We looked at the
Qeustion II: Underreaction and Overreaction.
We discussed a model of investor sentiment in class (lectures on Jun 2 and Jun 8). We looked at the empirical evidence of underreaction and overreaction in the stock markets and proposed behavioural explanations. Please answer the following questions.
- (2 points) What do the underreaction and overreaction mean in the stock markets?
- (3 points) What is the conservatism bias? How does it explain the underreaction?
- (3 points) What is the representativeness bias/heuristic? How does it explain the overreaction?
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