Market efficiency assumes all investors have the same information, interpret it the same way, and make the same forecasts. Some behavioral finance traits can lead to market inefficiencies such as representativeness, anchoring-and-adjustment, loss aversion, frame dependence, and overconfidence. Representativeness can take many forms and can be characterized as any time an investor bases expectations for the future on some past characteristic. Anchoring-and-adjustment refers to the inability to fully incorporate the impact of new information on previous projections. Loss aversion can lead to investors holding on to a losing stock too long or to increased risk seeking behavior to recover from a loss. Frame dependence refers to investors' tendency to frame their tolerance on the current direction of the market or in the context of the information received rather than on its own merits. Overconfidence is when people place too much confidence in their ability to predict resulting in unjustified bets |
