Richard Thaler won the latest Nobel prize in economics for his work that is focused on behavioral economics. Years ago in 1985 he also co-penned a white paper posing the question ‘Does the Stock Market Overreact?’ and found that the market does overreact to unexpected news. Well in this Market Ethos we looked at how share prices perform following either a big unexpected short term decline or a big unexpected short term gain.
We found that after big declines, performance tends to be strong as there is a partial rebound. Following big gains, short term performance tends to be muted and below average. We included in the report investment implications as well.