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A Model of Persuasion - With Implications for Financial Markets

Author

Listed:
  • 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.

Suggested Citation

  • Peter M. deMarzo & Dimitri Vayanos & Jeffrey Zwiebel, 2000. "A Model of Persuasion - With Implications for Financial Markets," Econometric Society World Congress 2000 Contributed Papers 1635, Econometric Society.
    • Handle: RePEc:ecm:wc2000:1635
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    References listed on IDEAS

    as
    1. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," The Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
    2. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-1071, September.
    3. 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 831-872, August.
    4. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," The Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    5. Margaret Bray & David M. Kreps, 1987. "Rational Learning and Rational Expectations," Palgrave Macmillan Books, in: George R. Feiwel (ed.), Arrow and the Ascent of Modern Economic Theory, chapter 19, pages 597-625, Palgrave Macmillan.
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    Cited by:

    1. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    2. Christopher Spencer, 2005. "Consensus Formation in Monetary Policy Committees," School of Economics Discussion Papers 1505, School of Economics, University of Surrey.
    3. David Hirshleifer & Siew Hong Teoh, 2003. "Herd Behaviour and Cascading in Capital Markets: a Review and Synthesis," European Financial Management, European Financial Management Association, vol. 9(1), pages 25-66, March.
    4. Robert J. Shiller, 2001. "Bubbles, Human Judgment, and Expert Opinion," Cowles Foundation Discussion Papers 1303, Cowles Foundation for Research in Economics, Yale University.

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