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Anticipating Asymmetrical Investor Reactions
Feb 1, 1990
In 1989 (Barra U.S. Newsletter #115, "Observations on Investor Reaction to Exceptional Returns," pp. 4-7), we proposed that a persistent asymmetry may exist between investors' reactions to extreme winners and extreme losers. Investors seem to cash out on extreme winners much sooner than they buy into extreme losers. We suggested this asymmetry was due to natural human cynicism. People have a tendency to be more averse to suffering losses than to forgoing subsequent gains, as Tversky and Kahneman have illustrated. (1) Whatever its cause, the asymmetry can be exploited if it persists. In 1989, we suggested a hedge strategy based on exploiting this asymmetry. In this article, we present an analysis of the actual performance the strategy would have generated. We used Barra's PC-based IPORCH program to generate the portfolio last year, and the new PC-based Performance System to analyze the results.