TY  - JOUR
AU  - Daniel,Kent
AU  - Titman,Sheridan
TI  - Market Efficiency in an Irrational World
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7489
PY  - 2000
Y2  - January 2000
UR  - http://www.nber.org/papers/w7489
L1  - http://www.nber.org/papers/w7489.pdf
N1  - Author contact info:
Kent D. Daniel
Columbia Business School
3022 Broadway, Uris Hall 709
New York, NY 10027
Tel: 212-854-4579
E-Mail: kd2371@columbia.edu

Sheridan Titman
Finance Department
McCombs School of Business
University of Texas at Austin
Austin, TX 78712-1179
Tel: 512/232-2787
Fax: 512/471-5073
E-Mail: titman@mail.utexas.edu
AB  - This paper explains why investors are likely to be overconfident and how this behavioral bias affects investment decisions. Our analysis suggests that investor overconfidence can potentially generate stock return momentum and that this momentum effect is likely to be the strongest in those stocks whose valuation requires the interpretation of ambiguous information. Consistent with this, we find that momentum effects are stronger for growth stocks than value stocks. A portfolio strategy based on this hypothesis generates strong abnormal returns that do not appear to be attributable to risk.  Although these results violate the traditional efficient markets hypothesis, they do not necessarily imply that rational but uniformed investors, without the benefit of hindsight, could have actually achieved the returns. We argue that to examine whether unexploited profit opportunities exist, one must test for what we call adaptive-efficiency, which is a somewhat weaker form of market efficiency that allows for the appearance of profit opportunities in historical data, but requires these profit opportunities to dissipate when they become apparent.  Our tests reject this notion of adaptive-efficiency.
ER  -