Contrarian Investment, Extrapolation, and Risk





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    • Lakonishok is from the University of Illinois, Shleifer is from Harvard University, and Vishny is from the University of Chicago. We are indebted to Gil Beebower, Fischer Black, Stephen Brown, K. C. Chan, Louis Chan, Eugene Fama, Kenneth French, Bob Haugen, Jay Ritter, René Stulz, and two anonymous referees for helpful comments and to Han Qu for outstanding research assistance. This article has been presented at the Berkeley Program in Finance, University of California (Berkeley), the Center for Research in Securities Prices Conference, the University of Chicago, the University of Illinois, the Massachusetts Institute of Technology, the National Bureau of Economic Research (Asset Pricing and Behavioral Finance Groups), New York University, Pensions and Investments Conference, the Institute for Quantitative Research in Finance (United States and Europe), Society of Quantitative Analysts, Stanford University, the University of Toronto, and Tel Aviv University. The research was supported by the National Science Foundation, Bradley Foundation, Russell Sage Foundation, the National Bureau of Economic Research Asset Management Research Advisory Group, and the National Center for Supercomputing Applications, University of Illinois.


For many years, scholars and investment professionals have argued that value strategies outperform the market. These value strategies call for buying stocks that have low prices relative to earnings, dividends, book assets, or other measures of fundamental value. While there is some agreement that value strategies produce higher returns, the interpretation of why they do so is more controversial. This article provides evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier.