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