Market Sentiment: A Tragedy of the Commons
AbstractWe present a model in which investors decide whether or to what degree they want to allow their behavior to be influenced by "market sentiment." Investors who choose to insulate their decisions from market sentiment earn higher expected returns, but incur a small mental cost. We show that if information is moderately dispersed across investors, even a very small mental cost may result in a significant amount of sentiment in equilibrium: Individuals who choose to be swayed by sentiment increase uncertainty about the future and make it less costly for others to be swayed by sentiment as well.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 101 (2011)
Issue (Month): 3 (May)
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- Tarek A. Hassan & Thomas M. Mertens, 2011.
"The Social Cost of Near-Rational Investment,"
NBER Working Papers
17027, National Bureau of Economic Research, Inc.
- Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, number 9780198296980.
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