Irrational Exuberance: Momentum Crashes and Speculative Bubbles

Abstract

The ψ statistic described in Sect. 11.4 is specific to a particular investment vehicle, such as a mutual fund or a hedge fund, whose net inflows and outflows of cash enable us to quantify the gap between hypothetical investment returns and the actual returns that real-life investors realized in fact. Unlike other anomalous departures from hypothetically efficient markets and capital asset pricing, however, the effect that ψ measures is almost entirely an artifact of investor behavior. Indeed, among the many phenomena documented in this book, the performance gap may be the purest example of a behavioral departure from perfect efficiency, rational expectations, and platonically maximized utility.