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Feedback and the Success of Irrational Investors

  • Hirshleifer, David
  • Subrahmanyam, Avanidhar
  • Titman, Sheridan

We provide a model in which irrational investors trade based upon considerations that are not inherently related to fundamentals. However, because trading activity affects market prices, and because of feedback from security prices to cash flows, the irrational trades influence underlying cash flows. As a result, irrational investors can, in some situations, earn positive expected profits. These expected profits are not market compensation for bearing risk, and can exceed the expected profits of rational informed investors. The trades of irrational investors can distort real investment choices and lower ex ante firm values, even though stocks prices follow a random

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Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt2b82s539.

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Date of creation: 06 Jun 2002
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Handle: RePEc:cdl:anderf:qt2b82s539
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