Publications

- October 1, 2017: Vol. 11, Number 09

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Why do markets over-react: Maybe investors are not as sophisticated as they think

by Joe Valente

Back in 1985, I worked in an office that was fuelled by the wonderful fumes of correcting fluid and the flimsiness of carbon paper. One day a rumour began to spread that the company had bought a computer, but that was OK. You see, we were all reassured, as it was going to be kept in the basement and wouldn’t be allowed to interfere with the comfortable rhythm of everyday working life. Communication thundered to the rattle of telex machines with keyboards the size of offcuts from small pocket battleships. At exactly the same time, two academics — Werner De Bondt and Richard Thaler — were busy putting together a paper that helped to lay the foundations of behavioural finance by showing how breaking news led to an over-reaction of stocks on the New York Stock Exchange. Emotion intervened and, when it did so, markets over-reacted and began to zig-zag in the most amusing of ways. Loose fundamentals In the time that has passed we have all learned t

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