1. People commit errors in the course of decision making; and these errors cause the prices of securities to be different from what they would have been in an error-free environment.
2. Investors overreact to both bad news and good news. Therefore, overreaction leads past losers to become under priced and past winners to become overpriced.
3. Disposition Effect: Investors are predisposed to holding losers too long and selling winners too early.
4. Long term earnings forecasts made by security analysts tend to be biased in the direction of recent success. Specifically, analysts overreact in that they are much more optimistic about recent winners than they are about recent losers.
5. When people are overconfident, they set overly narrow confidence bands. They set their high guess too low and their low guess too high.
6. Conservatism: Most of the security analysts react to earnings announcements: They do not revise their earnings estimates enough to reflect the new information. Consequently, positive earnings surprises tend to be followed by more positive earnings surprises, and negative surprises by more negative surprises.
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