Tech Stock Valuation

people often overreact to unexpected dramatic events. In revising their beliefs, indi-

vidual investors may overweigh recent information and underweigh prior base-rate

data on an ongoing basis. For example, momentum-based trading strategies are a

formalization of the recency effect; speculators simply buy what seems to be work-

ing. In the period up to the March 2000 peak, so long as Internet stocks were rising,

speculators kept buying and did not stop to worry about fundamental valuation.

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The practical usefulness of information about return reversal in stock market

returns, and theory from the field of behavioral finance, is documented to the

extent ...