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A Model of Persuasion - With Implications for Financial Markets

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  • Peter M. deMarzo

    (University of California)

  • Dimitri Vayanos

    (Massachusetts Institute of Technology)

  • Jeffrey Zwiebel

    (Stanford University)

Abstract

We propose a model of the phenomenon of persuasion. We argue that individual beliefs evolve in a way that overweights the opinions and information of individuals whom they "listen to" relative to other individuals. Such agents can be understood to be acting as though they believe they listen to a representative sample of the individuals with valuable information, even though they may not. We analyze dynamics and convergence of beliefs, characterizing when agents' beliefs converge over time to the same beliefs, and when they instead diverge. Convergent beliefs can be characterized as the weighted average of agents' initial beliefs, and these weights can be interpreted as a measure of ``influence.'' We then explore implications in an asset trading setting. Here we demonstrate that agents profit from being influential as well as being accurate. When agents' choice of whom to listen to is endogenous, we show that an individual's influence can be persistent, even though the individual may be inaccurate.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1635.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1635

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  1. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-72, August.
  2. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
  3. Glen Ellison, 2010. "Learning, Local Interaction, and Coordination," Levine's Working Paper Archive 391, David K. Levine.
  4. Simon Gervais & Terrance Odean, . "Learning To Be Overconfident," Rodney L. White Center for Financial Research Working Papers 05-97, Wharton School Rodney L. White Center for Financial Research.
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Cited by:
  1. Robert J. Shiller, 2001. "Bubbles, Human Judgment, and Expert Opinion," Cowles Foundation Discussion Papers 1303, Cowles Foundation for Research in Economics, Yale University.
  2. Christopher Spencer, 2005. "Consensus Formation in Monetary Policy Committees," School of Economics Discussion Papers 1505, School of Economics, University of Surrey.
  3. Hirshleifer, David & Teoh, Siew Hong, 2001. "Herd Behavior and Cascading in Capital Markets: A Review and Synthesis," MPRA Paper 5186, University Library of Munich, Germany.

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