Anomalies are identified by persistent abnormal returns that differ from zero and are predictable in direction.

Momentum refers to the inertia of a price trend to continue either rising or falling for a particular length of time. Before reverting to the mean, the favorable association typically lasts about two years. Momentum can be partly explained by availability (stocks will continue to rise because recently they have only risen), hindsight (FMPs invest in past winners because they regret not investing in them in the past) and loss aversion biases.

Bubbles and Crashes. Some bubbles may be products of sensible and logical reasoning. For instance, short-term performance-driven investment managers may attribute their decision to participate in a bubble to further advance their careers. There are a few obvious attributes of components of bubble psychology that play into market manias.

• Overconfidence bias leads to excessive trading and underestimating the risk involved.
• Hindsight bias: We see a short-term trend in Bitcoin, and we extend that forward in the future with higher confidence than the data would mathematically support.
• Anchoring bias: We hear a number, and when asked a value-based question, even unrelated to the number, they gravitate to the value that was suggested.
• Herd behavior: We are biologically wired to mimic the actions of the larger group.
• Confirmation bias: We selectively seek information that supports existing theories, and we ignore/dispute information that disproves those theories.

Value. High book-to-market equity, low price-to-earnings ratios, and low price-to-dividend ratios are common characteristics of value stocks. Growth stocks have the opposite characteristics.

Halo effect offers a behavioral explanation for the poor performance of growth stocks versus value stocks, Growth stocks are mispriced relative to their risk characteristics, because FMPs focusing on just a few properties, such as high historical revenue growth rate, while neglecting other characteristics.

Home bias refers to FMPs preferentially investing in domestic securities, likely reflecting perceived relative information advantages, a greater feeling of comfort with the access to company executives that proximity brings, or a psychological desire to invest in a local community.

Behavioral finance has the potential to explain some apparent deviations from market efficiency (market anomalies).