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Asset Mispricing Due to Cognitive Dissonance

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  • Bernhard Eckwert
  • Burkhard Drees

Abstract

The behavior of equity prices is analyzed in a general equilibrium model where agents have preferences not only over consumption but also (implicitly) over their beliefs. To alleviate cognitive dissonance, investors endogenously choose to ignore information that conflicts too much with their ex ante expectations. Depending on the new information that is released, systematic overvaluation and undervaluation of equity prices arise, as well as too much and too little equity price volatility. The distortion in the asset pricing process is closely related to the precision of the information.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/9.

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Length: 30
Date of creation: 01 Jan 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/9

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Related research

Keywords: Economic models; Stock markets; investors; stock prices; stock market; stock price; financial economics; asset markets; financial markets; investment decisions; stock market crashes; overvaluation; bond; expected value; financial market; stock returns; stock market prices; financial system; derivative; disclosure requirements; bond market; equilibrium asset prices; investment strategies; stock price volatility; stock price reactions; rate of return;

This paper has been announced in the following NEP Reports:

References

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