Experimental psychology is an integral part of the activities that take place in the stock market. For instance, one of the core assumptions of this type of psychology is that people have a general tendency of overreacting to news events that are dramatic and unexpected. Even in ordinary situations, this assumption seems to be very true. Hence, Bayes’ rule can assist the stock market analysts to study market efficiencies. On the other hand, perhaps it is vital to explore whether overreaction to dramatic events can interfere with the pricing of securities in the stock market.
The main challenge of the overreaction hypothesis is that it does not have a common standing point. The qualitative study carried out by CRSP indicates that the overreaction hypothesis can indeed influence the movement of stock prices. After analyzing the monthly returns data from CRSP, it was found out that the stability and even the pricing of securities at the stock market is largely affected when people overreact to unanticipated events. Nonetheless, it is indeed necessary to investigate whether there are other significant market factors that may be instrumental in the pricing of stocks (De Bondt and Thaler 796). If this hypothesis is taken to be substantial in the stock market, then the degree of its influence should also be investigated. It may not be justified to ignore the level of influence because it may be a very small factor in the overall pricing stability of stock prices.
Works Cited
De Bondt, Werner and Richard, Thaler. “Does the Stock Market Overreact?” The Journal of Finance 40.3 (1985): 793-804. Print.