Does the Stock Market Overreact?

Richard Thaler

Research

14 Pages

The authors test whether investors overreact to dramatic news, creating predictable stock price reversals. Across NYSE data from 1926 through 1982, prior losers outperformed prior winners by about 25% after 36 months, challenging weak form market efficiency and revealing persistent January seasonality.

Key Takeaways

Losers Rebounded Strongly: Loser portfolios outperformed the market by 19.6%, while winners trailed it by 5.0% after 36 months.
January Drove Returns: Losers generated excess returns of 8.1%, 5.6%, and 4.0% during three separate January periods.
Extremes Mattered Most: Five year winner and loser portfolios showed a 31.9% return difference after 60 months, while one year portfolios showed no reversal.
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