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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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