Market Sentiment: A Tragedy of the Commons
We 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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Volume (Year): 101 (2011)
Issue (Month): 3 (May)
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- Tarek A. Hassan & Thomas M. Mertens, 2017.
"The Social Cost of Near-Rational Investment,"
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American Economic Association, vol. 107(4), pages 1059-1103, April.
- Thomas M. Mertens & Tarek A. Hassan, 2010. "The Social Cost of Near-Rational Investment," 2010 Meeting Papers 370, Society for Economic Dynamics.
- Hassan, Tarek A. & Mertens, Thomas M., 2016. "The Social Cost of Near-Rational Investment," Working Paper Series 2016-16, Federal Reserve Bank of San Francisco.
- Hassan, Tarek & Mertens, Thomas M., 2014. "The Social Cost of Near-Rational Investment," CEPR Discussion Papers 10007, C.E.P.R. Discussion Papers.
- 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. Full references (including those not matched with items on IDEAS)