Market Overreaction

Market overreaction refers to the phenomenon where investors respond excessively to news or events, causing stock prices to move more drastically than warranted. For example, if a company reports disappointing earnings, its stock might plummet sharply, even if the long-term prospects remain solid. This excessive reaction can lead to inflated prices during good news and steep drops during bad news. Eventually, the market often corrects itself as investors reassess the situation, indicating that initial reactions were too extreme. Understanding this can help investors make more informed decisions, avoiding panic or euphoria based solely on short-term market movements.