IDEAS home Printed from https://ideas.repec.org/a/fec/journl/v8y2013i3p293-308.html
   My bibliography  Save this article

Do Irrational Investors Destabilize?

Author

Listed:
  • Hao Li

    (Department of Economics, University of British Columbia, Vancouver, BC V6T 1Z8, Canada)

Abstract

In a financial market where all investors have valuable private information, full rationality requires that investors have an unlimited ability of figuring out the equilibrium model. Instead, I assume that due to a lack of knowledge or experience, some investors do not know the equilibrium model and use only their private information in forming their demand. By investigating the investment behavior of these ¡°boundedly rational¡± investors and contrasting it with that of the rational ones, I find that in a market where the two kinds of investors coexist, it is the boundedly rational investors who contribute to price stability. The welfare implication is that, although each investor benefits from conditioning his asset demand on the information transmitted by the equilibrium price, it can happen that all investors lose by doing so because the equilibrium price becomes too volatile.

Suggested Citation

  • Hao Li, 2013. "Do Irrational Investors Destabilize?," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 8(3), pages 293-308, September.
    • Handle: RePEc:fec:journl:v:8:y:2013:i:3:p:293-308
    as

    Download full text from publisher

    File URL: http://journal.hep.com.cn/fec/EN/10.3868/s060-002-013-0016-5
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Felipe Schwartzman, 2013. "The Business Cycle Behavior of Working Capital," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 287-303.

    More about this item

    Keywords

    irrational investor; destabilize; equilibrium; stability;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fec:journl:v:8:y:2013:i:3:p:293-308. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Frank H. Liu (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.