Momentum and Overreaction Anomalies. The debate surrounding investor overreaction and contrarian investing is one of the most extensive and controversial areas of research in finance. The overreaction anomaly, evidenced by long-term reversals in stock returns, was first identified by De Bondt and Thaler (1985), who showed that stocks which perform poorly in the past three to five years demonstrate superior performance over the next three to five years compared to stocks that have performed well in the past. The study provided evidence that abnormal excess returns could be gained by employing a strategy of buying past losers and selling short past winners, or the contrarian strategy.

Although the overreaction anomaly and market momentum do seem to exist, researchers have argued that the existence of momentum is rational, and the additional return (based on the contrarian investment strategy) would come simply at the expense of increased risk.