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Overconfidence and Market Efficiency with Heterogeneous Agents

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  • Diego García

    ()

  • Francesco Sangiorgi

    ()

  • Branko Urošević

    ()

Abstract

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrele- vance 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 conse- quence the overconfidence bias does not affect informational efficiency, price volatility, ra- tional 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 overcon- fident. The main intuition of the paper, if not the irrelevance result, is shown to be robust to different model specifications.

(This abstract was borrowed from another version of this item.)

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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 30 (2007)
Issue (Month): 2 (February)
Pages: 313-336

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Handle: RePEc:spr:joecth:v:30:y:2007:i:2:p:313-336

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Related research

Keywords: Partially revealing equilibria; Overconfidence; Rational expectations; Information acquisition; Price informativeness; D80; G10;

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References

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Citations

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Cited by:
  1. Benoît, Jean-Pierre & Dubra, Juan & Moore, Don, 2009. "Does the Better-Than-Average Effect Show That People Are Overconfident?: Two Experiments," MPRA Paper 44956, University Library of Munich, Germany, revised 11 Mar 2013.
  2. Zhou, Deqing, 2013. "Irrational confidence, imperfect and long-lived information," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 383-405.
  3. M. Middeldorp & S. Rosenkranz, 2008. "Information acquisition in an experimental asset market," Working Papers, Utrecht School of Economics 08-25, Utrecht School of Economics.
  4. Benoît, Jean-Pierre & Dubra, Juan & Moore, Don, 2009. "Does the Better-Than-Average Effect Show That People Are Overconfident?: An Experiment," MPRA Paper 13168, University Library of Munich, Germany.
  5. Jean-Pierre Benoit & Juan Dubra, 2008. "Overconfidence," NajEcon Working Paper Reviews 122247000000002148, www.najecon.org.
  6. Juan Dubra & Jean-Pierre Benoit, 2011. "Apparent Overconfidence," Documentos de Trabajo/Working Papers 1106, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..
  7. Luca Rigotti & Matthew Ryan & Rhema Vaithianathan, 2011. "Optimism and firm formation," Economic Theory, Springer, Springer, vol. 46(1), pages 1-38, January.
  8. Rietveld, C.A. & Groenen, P.J.F. & Koellinger, Ph.D. & van der Loos, M.J.H.M. & Thurik, A.R., 2013. "Living Forever: Entrepreneurial Overconfidence at Older Ages," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2013-012-STR, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  9. Bertrand BLANCHETON (GREThA UMR CNRS 5113) & Yves JEGOUREL (LAREFI), 2009. "Sovereign wealth funds: toward a new state capitalism? (In French)," Cahiers du GREThA, Groupe de Recherche en Economie Théorique et Appliquée 2009-04, Groupe de Recherche en Economie Théorique et Appliquée.

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