Question

DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period. good; good

Answer 1

Answer:

DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced good performance in the following period and that the best-performing stocks in one time period experienced poor performance in the following time period.

Explanation:

In their 1985 paper Does the Stock Market Overreact?, economists Werner DeBondt and Richard Thaler analyzed the performance of the stock market and found out that people were falling for what is called the "hot hand fallacy", where people think (erroneously) that what has been happening in recent times will continue to happen indefinitely. In the stock market, this leads to people thinking poor-performing stocks will continue to perform poorly, while good-performing stocks will continue to perform positively. However, empirical research doesn't support this, as they found out that the poorest-performing stocks in one time period experienced good performance in the following period and that the best-performing stocks in one time period experienced poor performance in the following time period. But many investors found themselves on the wrong end of poor trades because they fell for the hot hand fallacy.