We provide a methodology for examining the existence and magnitude of behavioral biases in stock returns. The in.uence of behavioral biases is modeled using a .rm-speci.c probability which represents the market抯 beliefs regarding future price movements. Behavioral biases that distort this market probability create autocorrelated abnormal returns and excess return volatility. Consistent with Barberis, Shleifer, and Vishny (1998)'s theoretical model, our empirical implementation detects the presence of representativeness and conservatism in stock returns. A trading strategy derived from the in.uence of these behavioral biases on the market probability produces a 9.88% annual return.
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