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What's Causing Overreaction? An Experimental Investigation of Recency and the Hot-hand Effect

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  • Theo Offerman
  • Joep Sonnemans

Abstract

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 hot-hand 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 hot-hand hypothesis. Copyright The editors of the "Scandinavian Journal of Economics", 2004 .

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Bibliographic Info

Article provided by Wiley Blackwell in its journal The Scandinavian Journal of Economics.

Volume (Year): 106 (2004)
Issue (Month): 3 (October)
Pages: 533-554

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Handle: RePEc:bla:scandj:v:106:y:2004:i:3:p:533-554

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Cited by:
  1. Offerman, Theo & Schotter, Andrew, 2009. "Imitation and luck: An experimental study on social sampling," Games and Economic Behavior, Elsevier, vol. 65(2), pages 461-502, March.
  2. Morris, Michael W. & Sheldon, Oliver J. & Ames, Daniel R. & Young, Maia J, 2007. "Metaphors and the market: Consequences and preconditions of agent and object metaphors in stock market commentary," Organizational Behavior and Human Decision Processes, Elsevier, vol. 102(2), pages 174-192, March.
  3. Carlson, Kurt A. & Shu, Suzanne B., 2007. "The rule of three: How the third event signals the emergence of a streak," Organizational Behavior and Human Decision Processes, Elsevier, vol. 104(1), pages 113-121, September.
  4. Holt, Charles A. & Smith, Angela M., 2009. "An update on Bayesian updating," Journal of Economic Behavior & Organization, Elsevier, vol. 69(2), pages 125-134, February.
  5. Laurent Denant-Boemont & Sabrina Hammiche, 2008. "Que vaut la flexibilité des choix individuels de transport ? Une étude de cas expérimental," Économie et Prévision, Programme National Persée, vol. 182(1), pages 97-111.
  6. Galarza, Francisco, 2009. "Risk, Credit, and Insurance in Peru: Field Experimental Evidence," MPRA Paper 17833, University Library of Munich, Germany.

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