Offerman, T. and Sonnemans, J. (2004). What's Causing Overreaction? An Experimental Investigation of Recency and the Hot Hand Effect The Scandinavian Journal of Economics, 106:533--553.
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Affiliated authors
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Publication year2004
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JournalThe Scandinavian Journal of Economics
A substantial body of empirical literature provides evidence of overreaction in markets. Past losers outperform past winners in stock markets as well as in sports markets. Two hypotheses are consistent with this observation. The recency hypothesis states that traders overweight recent information; they are too optimistic about winners and too pessimistic about losers. According to the hothand hypothesis, traders try to discover trends in the past record of a firm or a team, and thereby overestimate the autocorrelation in the series. An experimental design allows us to distinguish between these hypotheses. The evidence is consistent with the hothand hypothesis.