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JOURNAL OF ACCOUNTING AND FINANCE
The Psychological Explanation of Asset Price Overreaction and Underreaction to New
Information: Representativeness Heuristic and Conservatism Bias
Author(s): Guo Ying Luo
Citation: Guo Ying Luo, (2012) "The Psychological Explanation of Asset Price Overreaction and Underreaction to New Information: Representativeness Heuristic and Conservatism Bias," Vol. 12, Iss. 2, pp. 38 - 50
Article Type: Research paper
Publisher: North American Business Press
Abstract:
In the model of an asset market with strategic interaction among traders, this paper proves that the occurrence of asset price overreaction and underreaction to new information depends on the proportion of conservatism traders, proportion of heuristic traders, degree of conservatism bias, degree of representativeness heuristic and the number of traders in the market. Specifically, the asset price overreacts to good news and underreacts to bad news when the total representativeness heuristic minus the total conservatism bias in the market is greater than zero but less than one; otherwise, the asset price underreacts to good news and overreacts to bad news.
