A news story about United Airline’s decision to seek protection from creditors was originally published December 10, 2002 by the Chicago Tribune. The story was re-circulated by a Florida news service in 2008. Following the re-circulated story there was a steep sell-off in United’s shares. When the story hit Bloomberg News, United’s stock fell from about $12 per share to $3 per share. Once the truth was out, the stock got back to a slightly lower $10.
a. Use your knowledge of behavioral biases among investors to explain the market reaction to the incorrect news.
b. Why didn’t the share price immediately return to $12 after the truth was known?
c. Does this market behavior contradict the efficient market hypothesis?