Overshooting

You've seen Steph Curry do this a few times. You've seen your little brother do this as well when he was just learning to get all of it actually in the potty.

Eh, okay. Different kind of overshooting.

You've probably noticed, but prices don't change all that often. Sure, stock prices change moment to moment, currency exchange rates bounce around constantly on the open market, and commodity prices fluctuate throughout the trading day. But the prices we pay for our goods and services don't react immediately to these changes. Buy a hamburger for $7.75 today, it will probably cost $7.75 tomorrow and next week. These prices are sticky. In fact, that's the name that economists came up with to describe them: sticky prices.

For changes in market prices (currency rates, interest rates, etc.) to work their way down to our hamburger prices, it takes time. And it goes through a series of steps first. Changes might work their way through financial markets, and producer prices, and bond markets, etc. before they hit our wallets.

This situation turns the whole process into a game of telephone. Meaning that one market forces a change in another market, forcing a change in a subsequent market, and so on down the line. Each market has a tendency to overreact to the changes, as traders, investors, and other actors attempt to anticipate further market moves.

The end result: overshooting. Markets don't just reach an equilibrium (as was once thought in classical economics). The process can get messier, and involves overreactions: i.e. overshooting.

This theory was first proposed in 1976 by economist Rudiger Dornbusch, and has been supported by a lot of subsequent research.