Financial Markets Where Traders Neglect the Informational Content of Prices
By Erik Eyster, Matthew Rabin, Dimitri Vayanos. Journal of Finance, 2018
128 citations recorded by the source corpus.
We present a model of a financial market where some traders are "cursed" when choosing how much to invest in a risky asset, failing to fully take into account what prices convey about others' private information. Cursed traders put more weight on their private signals than rational traders. But because they neglect that the price encodes other traders' information, prices depend less on private signals and more on public signals than rational-expectation-equilibrium (REE) prices. Markets comprised entirely of cursed traders generate more trade than those comprised entirely of rationals; mixed markets can generate even more trade, as rationals employ momentum-trading strategies to exploit cursed traders. We contrast our results to other models of departures from REE and show that per-trader volume with cursed traders increases when the market becomes large, while natural forms of overconfidence predict that volume should converge to zero.
Subfields: Accounting, Finance, Safety Research
View Paper: https://www.semanticscholar.org/paper/0e87b67925601ee7533b2873bc95a222a920efe2
How researchers see this paper
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In Accounting
In Finance
- Nicholas Barberis
- Doron Avramov
- Allan G. Timmermann
- Massimo Guidolin
- Michael W. Brandt
- Jessica A. Wachter
- A. Shleifer
- Yihong Xia
In Safety Research
Citations in the corpus
- Presidential Address: Social Transmission Bias in Economics and Finance (2020, unknown): “The underweighting of the information in market price is akin to cursedness as in Eyster, Rabin, and Vayanos (2018), that is, investor neglect of the extent to which the actions of others reflect private information.”
- Psychology-based Models of Asset Prices and Trading Volume (2018, background): “More precisely, following Eyster et al. (2018), I will say that an investor is “overconfident” if he overestimates the precision of his own information signal, and “dismissive” if he underestimates the precision of other people’s information signals.”