Over- and Underreactions on Capital Markets: How Investor Sentiment Leads to Irrational Price Behavior

For many decades the stock markets were considered the mother-of-all efficient markets. All investors behave rational, all information is available at the same time to all market participants, and if that was not true, Arbitrage would force efficiency and rationality on prices and the market. However, recent history, such as the burst of the dotcom bubble or the sub-prime crisis, painfully taught us that this is not true. The focus of this book is on why markets are not so efficient after all and why prices over- and underreact. Investors are not acting rational, they underlie many diverse biases such as overconfidence when making decisions under uncertainty. After challenging the Efficient Markets Hypothesis the author explores various reasons which lead to over- and underreactions in prices. Then he discusses different pricing models which aim to account for investor sentiment and irrationality. Based on this investment opportunities and strategies for managers resulting from irrational pricing are examined. Investors, persons working in corporate finance or investor relations, and any other market participant will find this book interesting.