5 Scholarly Articles to Validate Your Value Investment Bias

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Value Investment Bias

This article appeared first on The Stock Market Blueprint Blog.

Let’s admit it. As value investors, we all have a value investment bias. In fact, all investors are bias toward their preferred approach.

Confirmation bias is rampant in all walks of life – politics, religion, fad diets, favorite sports teams, etc. Investing is no different.

Wherever opinions and counter opinions come together, people are bound to actively seek evidence that confirms their opinions.

Embrace Your Value Investment Bias

Most experts claim to be above this phenomenon by insisting it does not affect them. Rather than denying or hiding your value investment bias, I’m going to make it easy for you to embrace it.

Below are five scholarly articles which will validate your value investment bias. These studies are well-accepted throughout both the academic and professional investment communities.

Value versus Growth

Fama, Eugene F. and French, Kenneth R., Value versus Growth: The International Evidence, 1997.


Value stocks have higher returns than growth stocks in markets around the world. For 1975-95, the difference between the average returns on global portfolios of high and low book-to-market stocks is 7.60% per year, and value stocks outperform growth stocks in 12 of 13 major markets. An international CAPM cannot explain the value premium, but a two-factor model that includes a risk factor for relative distress captures the value premium in international returns.

Does the Stock Market Overreact?

De Bondt, W. F. M. and Thaler, R., Does the Stock Market Overreact?, 1985.


Research in experimental psychology suggests that, in violation of Bayes’ rule, most people tend to “overreact” to unexpected and dramatic news events. This study of market efficiency investigates whether such behavior affects stock prices. The empirical evidence, based on CRSP monthly return data, is consistent with the overreaction hypothesis. Substantial weak form market inefficiencies are discovered. The results also shed new light on the January returns earned by prior “winners” and “losers.” Portfolios of losers experience exceptionally large January returns as late as five years after portfolio formation.

Further Evidence on Investor Overreaction and Stock Market Seasonality

De Bondt, W. F. M. and Thaler, R., Further Evidence on Investor Overreaction and Stock Market Seasonality, 1987.


In a previous paper, we found systematic price reversals for stocks that experience extreme long-term gains or losses: Past losers significantly outperform past winners. We interpreted this finding as consistent with the behavioral hypothesis of investor overreaction. In this follow-up paper, additional evidence is reported that supports the overreaction hypothesis and that is inconsistent with two alternative hypotheses based on firm size and differences in risk, as measured by CAPM-betas. The seasonal pattern of returns is also examined. Excess returns in January are related to both short-term and long-term past performance, as well as to the previous year market return.

Contrarian Investment, Extrapolation, and Risk

Lakonishok, J., Shleifer, A., and Vishny, R. W., Contrarian Investment, Extrapolation, and Risk, 1994.


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.

Double then Nothing, Why Stock Investments Relying on Simple Heuristics May Disappoint

Foerster, Stephen, Double then Nothing: Why Stock Investments Relying on Simple Heuristics May Disappoint, 2011.


Behavioral researchers argue that although individuals often rely on heuristics or rules of thumb that reduce the complexity involved in predicting values, such heuristics can lead to severe and systematic errors. I test this argument in an investment context by focusing on a simple heuristic whereby momentum traders are attracted to buying stocks that have recently doubled in price in anticipation of further gains. I show that such a strategy can lead to predictable disappointment for these investors and severe underperformance relative to the market (?28% over a 4-year period), whereas investors who avoid relying on this simple heuristic are likely to perform as expected, on average similar to the overall market. I also find that underperformance is more severe for stocks that have doubled faster. The “doubling” variable is a significant predictor of future price reversals in addition to past performance per se, as uncovered by the previous researchers.

Value Investment Bias – The Evidence is Clear

The scholarly articles highlighted above all provide overwhelming evidence that value stocks – or stocks with low price ratios – consistently outperform growth or any other investment approach.

If these aren’t enough to validate your value investment bias, there are hundreds more. This is evident in the dozens of articles cited in each of the above papers.

The next time you start to question whether value investing really works, set aside a few hours and read a scholarly article in its entirety. If you don’t know where to start, any one of the five articles discussed above will do just fine.

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