At the individual stock level, we search for events that suggest investor misbehavior.

Investors Make Mistakes.

We Look For Them.

There are two kinds of mistakes that produce buying opportunities: over-reaction and under-reaction.

 

Other investors may over-react to bad news and losses (e.g., panic). Or they may under-react to good news (e.g., not pay attention).

Over-reaction 

...to historical, negative information

Under-reaction

...to new, positive information