Behavioral Finance Theories and the Price Behavior of the ISE Around the Start of the Disinflation Programme

I present a detailed review of four recent behavioral theories to explain the pervasive evidence of under- and overreactions in financial markets. Then, I formally show that the price behavior of the Istanbul Stock Exchange (ISE) stocks around the commencement of the 2000-2003 disinflation programme is a good example of both under-, but especially of overreactions. Further analysis indicates that this price behavior fits interestingly well to (are explicable by) the predictions of these behavioral theories. Small investors would benefit a lot from the lessons of behavioral theories.