Overconfidence and market efficiency with heterogeneous agents
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...
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| Veröffentlicht in: | Economic theory 2007-02, Vol.30 (2), p.313-336 |
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| container_title | Economic theory |
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| creator | García, Diego Sangiorgi, Francesco Urošević, Branko |
| description | 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. |
| doi_str_mv | 10.1007/s00199-005-0048-4 |
| format | Article |
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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. 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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. 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Sangiorgi, Francesco ; Urošević, Branko</author></sort><facets><frbrtype>5</frbrtype><frbrgroupid>cdi_FETCH-LOGICAL-c430t-c954c74f7e0d19881024bb12dc7b2c3ddc6433532521da97647c750df8f202e53</frbrgroupid><rsrctype>articles</rsrctype><prefilter>articles</prefilter><language>eng</language><creationdate>2007</creationdate><topic>Capital market</topic><topic>Competition</topic><topic>Economic agents</topic><topic>Economic modeling</topic><topic>Economic models</topic><topic>Economic psychology</topic><topic>Economic theory</topic><topic>Economics</topic><topic>Efficient markets</topic><topic>Equilibrium</topic><topic>Equilibrium prices</topic><topic>Expectations</topic><topic>Expected utility</topic><topic>Externality</topic><topic>Financial information</topic><topic>Financial markets</topic><topic>Financial theory</topic><topic>Heterogeneous economic agents</topic><topic>Information</topic><topic>Information acquisition</topic><topic>Investments</topic><topic>Irrationality</topic><topic>Liquidity</topic><topic>Market prices</topic><topic>Overconfidence</topic><topic>Price formation</topic><topic>Prices</topic><topic>Securities markets</topic><topic>Stockbrokers</topic><topic>Studies</topic><topic>Trade</topic><topic>Volatility</topic><toplevel>peer_reviewed</toplevel><toplevel>online_resources</toplevel><creatorcontrib>García, Diego</creatorcontrib><creatorcontrib>Sangiorgi, Francesco</creatorcontrib><creatorcontrib>Urošević, Branko</creatorcontrib><collection>CrossRef</collection><collection>Global News & ABI/Inform Professional</collection><collection>Trade PRO</collection><collection>ProQuest Central (Corporate)</collection><collection>Access via ABI/INFORM (ProQuest)</collection><collection>ABI/INFORM Global (PDF only)</collection><collection>ProQuest Central (purchase pre-March 2016)</collection><collection>ABI/INFORM Global (Alumni Edition)</collection><collection>ProQuest Pharma Collection</collection><collection>International Bibliography of the Social Sciences (IBSS)</collection><collection>ProQuest Central (Alumni) (purchase pre-March 2016)</collection><collection>ABI/INFORM Collection (Alumni Edition)</collection><collection>Research Library (Alumni Edition)</collection><collection>ProQuest Central (Alumni Edition)</collection><collection>ProQuest Central UK/Ireland</collection><collection>ProQuest Central Essentials</collection><collection>ProQuest Central</collection><collection>Business Premium Collection</collection><collection>ProQuest One Community College</collection><collection>ProQuest Central Korea</collection><collection>International Bibliography of the Social Sciences</collection><collection>Business Premium Collection (Alumni)</collection><collection>ABI/INFORM Global (Corporate)</collection><collection>ProQuest Central Student</collection><collection>Research Library Prep</collection><collection>International Bibliography of the Social Sciences</collection><collection>ProQuest Business Collection (Alumni Edition)</collection><collection>ProQuest Business Collection</collection><collection>ABI/INFORM Professional Advanced</collection><collection>ABI/INFORM Professional Standard</collection><collection>ABI/INFORM Global</collection><collection>Research Library</collection><collection>Research Library (Corporate)</collection><collection>ProQuest One Business</collection><collection>ProQuest One Business (Alumni)</collection><collection>ProQuest One Academic Eastern Edition (DO NOT USE)</collection><collection>ProQuest One Academic</collection><collection>ProQuest One Academic UKI Edition</collection><collection>ProQuest Central Basic</collection><jtitle>Economic theory</jtitle></facets><delivery><delcategory>Remote Search Resource</delcategory><fulltext>fulltext</fulltext></delivery><addata><au>García, Diego</au><au>Sangiorgi, Francesco</au><au>Urošević, Branko</au><format>journal</format><genre>article</genre><ristype>JOUR</ristype><atitle>Overconfidence and market efficiency with heterogeneous agents</atitle><jtitle>Economic theory</jtitle><date>2007-02-01</date><risdate>2007</risdate><volume>30</volume><issue>2</issue><spage>313</spage><epage>336</epage><pages>313-336</pages><issn>0938-2259</issn><eissn>1432-0479</eissn><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.</abstract><cop>Heidelberg</cop><pub>Springer</pub><doi>10.1007/s00199-005-0048-4</doi><tpages>24</tpages><oa>free_for_read</oa></addata></record> |
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| source | EBSCOhost Business Source Complete; JSTOR Archive Collection A-Z Listing; SpringerLink Journals - AutoHoldings |
| subjects | Capital market Competition Economic agents Economic modeling Economic models Economic psychology Economic theory Economics Efficient markets Equilibrium Equilibrium prices Expectations Expected utility Externality Financial information Financial markets Financial theory Heterogeneous economic agents Information Information acquisition Investments Irrationality Liquidity Market prices Overconfidence Price formation Prices Securities markets Stockbrokers Studies Trade Volatility |
| title | Overconfidence and market efficiency with heterogeneous agents |
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