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Can an overconfident insider coexist with a representativeness heuristic insider?

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  • Liu, Hong
  • Du, Sarina

Abstract

This paper develops an insider trading model that incorporates the presence of rational, overconfident, and representativeness heuristic insiders. We find that the heuristic insider and overconfident insider trade more aggressively on their information than the rational insider, and that therefore, a higher probability exists for them to earn more profits. Furthermore, both higher heuristic bias of the heuristic insider and greater overconfidence of the overconfident insider lead to less expected profit for the rational insider and less expected loss for the noise trader. Moreover, in an equilibrium, both higher heuristic bias and greater overconfidence of an insider lead to a more efficient and stable market.

Suggested Citation

  • Liu, Hong & Du, Sarina, 2016. "Can an overconfident insider coexist with a representativeness heuristic insider?," Economic Modelling, Elsevier, vol. 54(C), pages 170-177.
  • Handle: RePEc:eee:ecmode:v:54:y:2016:i:c:p:170-177
    DOI: 10.1016/j.econmod.2015.12.032
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    References listed on IDEAS

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    5. Hirshleifer, David & Luo, Guo Ying, 2001. "On the survival of overconfident traders in a competitive securities market," Journal of Financial Markets, Elsevier, vol. 4(1), pages 73-84, January.
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    10. Ying Luo, Guo, 2013. "Can representativeness heuristic traders survive in a competitive securities market?," Journal of Financial Markets, Elsevier, vol. 16(1), pages 152-164.
    11. Liu, Hong & Zhang, Zhixiang, 2011. "Insider trading with public and shared information," Economic Modelling, Elsevier, vol. 28(4), pages 1756-1762, July.
    12. Benos, Alexandros V., 1998. "Aggressiveness and survival of overconfident traders," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 353-383, September.
    13. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
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