Trend-Chasing

Abstract

The human brain is hard-wired to look for patterns even in randomness. A common bias in investing is the extrapolation bias or the tendency to buy assets that have high past returns and sell assets that have low past returns. Trend-chasing is particularly common among individual and inexperienced investors. This chapter analyzes the psychological biases that precipitate trend-chasing, surveys the research evidence on trend-chasing from psychology, economics, and finance, and examines the short-and longterm consequences of this form of behavior.