Markets: Movement and Uncertainty Reduction

This figure plots how movement and uncertainty reduction vary as a function of time to market resolution. If prices reflected Bayesian beliefs, movement would be exactly equal to uncertainty reduction. Compared to this benchmark, excess movement is consistent with overreaction, and too little movement is consistent with underreaction (Augenblick and Rabin, 2021). 

This figure shows that as the market is far from resolving, signals tend to be weak (so movement and uncertainty reduction are small) and the market overreacts. As the market is close to resolving, signals tend to be strong (so movement and uncertainty reduction are large) and the market underreacts.

Error bars indicate 95% confidence intervals.