Overconfidence is at work here, of course; people believe they understand the data more clearly than others and interpret it better. But there is more to it. Overconfidence is exacerbated by overreaction. The behaviorists have learned that people tend to overreact to bad news and react slowly to good news. Psychologists call this overreaction bias. Thus, if the short-term earnings report is not good, the typical investor response is an abrupt, ill-considered overreaction, with its inevitable effect on stock prices.
