t which they believe to be incorrect
Confirmation bias: evidence indicates that once investors form an hypothesis, they accept as confirmatory evidence findings that actually are antithetical to their hypothesis (this behavior is related to the innate conservatism that downgrades the value of findings with which they disagree
Anchoring: evidence that investor tend to establish an arbitrary baseline for their assessments, which is modified as new information is developed; evidence also indicates, however, that modifications of baseline data are consistently inadequate
Memory biases: evidence indicates that most investors do not incorporate all relevant information into their assessments; relying instead on memories of recent or salient events
Prospect theory: evidence indicates that investors either are not capable of or choose not to accurately apply the concept of expected utility
Ambiguity aversion: evidence indicates that most investors find ambiguity distasteful; as a consequence, they tend to ignore data that introduce ambiguity into their investment assessments
Regret theory: evidence indicates that many investors regret and fear errors of judgment in investing; as a consequence, they tend to stick with an investment rather than acknowledge a mistake; additionally, they may follow the lead of others (herd instinct) as a means of persuading themselves that they will not make an erroneous investment decision
The Over-Reaction & the Under-Reaction Hypothesis
Research has found that publicly-traded equity stocks that perform best in a prior period tend to under-perform in following periods. The reverse phenomenon - publicly-traded stocks that under-perform in a prior period tend to over-perform in following periods. Behavioural finance theory explains such behaviours within the context of the over-reaction and the under-reaction hypothesis. The hypothesis holds generally that investors tend to over-react to ...