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- Title
Overconfidence and Market Efficiency with Heterogeneous Agents.
- Authors
García, Diego; Sangiorgi, Francesco; Urošević, Branko
- Abstract
We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result when a positive fraction of rational agents (endogenously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not affect informational efficiency, price volatility, rational traders' expected profits or their welfare. Intuitively, as overconfidence goes up, so does price informativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident. The main intuition of the paper, if not the irrelevance result, is shown to be robust to different model specifications.
- Subjects
FINANCIAL markets; MARKET volatility; INVESTORS; EFFICIENT market theory; INVESTMENT analysis; FINANCE; PRICES; STOCKS (Finance); STAKEHOLDERS
- Publication
Economic Theory, 2007, Vol 30, Issue 2, p313
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-005-0048-4