Investor Optimism, False Hopes and the January Effect
This paper proposes that the January Effect is at least partly explained by a behavioral framework based on optimistic expectations. The turn-of-the-year is hypothesized to be a time of renewed optimism. Indeed, investor sentiment, as measured by the University of Michigan's Index of
Consumer Confidence, peaks in January. Thus, optimists are expected to bid up the stock prices of firms with higher levels of uncertainty in January. These firms will subsequently underperform as they disappoint investors during the remainder of the year. Despite the disappointment, the January
pattern persists due to the “false hope syndrome” described in the psychology literature. Using forecast dispersion to proxy for uncertainty, the results are consistent with the optimism hypothesis. Similar reasoning may help explain other anomalies.