IDEAS home Printed from https://ideas.repec.org/p/red/sed010/370.html
   My bibliography  Save this paper

The Social Cost of Near-Rational Investment

Author

Listed:
  • Thomas M. Mertens

    (NYU Stern School of Business)

  • Tarek A. Hassan

    (Chicago Booth School of Business)

Abstract

run level of capital accumulation. Through its effect on capital accumulation excess volatility causes costly (fi rst-order) distortions in the long-run level of consumption.

Suggested Citation

  • Thomas M. Mertens & Tarek A. Hassan, 2010. "The Social Cost of Near-Rational Investment," 2010 Meeting Papers 370, Society for Economic Dynamics.
  • Handle: RePEc:red:sed010:370
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2010/paper_370.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. N. Bloom., 2016. "Fluctuations in uncertainty," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
    2. Melvin Stephens, 2008. "The Consumption Response to Predictable Changes in Discretionary Income: Evidence from the Repayment of Vehicle Loans," The Review of Economics and Statistics, MIT Press, pages 241-252.
    3. Grossman, Sanford J, 1976. "On the Efficiency of Competitive Stock Markets Where Trades Have Diverse Information," Journal of Finance, American Finance Association, vol. 31(2), pages 573-585, May.
    4. Larry G. Epstein & Emmanuel Farhi & Tomasz Strzalecki, 2014. "How Much Would You Pay to Resolve Long-Run Risk?," American Economic Review, American Economic Association, pages 2680-2697.
    5. Philippe Bacchetta & Eric Van Wincoop, 2008. "Higher Order Expectations in Asset Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(5), pages 837-866, August.
    6. Markus K. Brunnermeier & Alp Simsek & Wei Xiong, 2014. "A Welfare Criterion For Models With Distorted Beliefs," The Quarterly Journal of Economics, Oxford University Press, pages 1753-1797.
    7. Martin Browning & M. Dolores Collado, 2001. "The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates," American Economic Review, American Economic Association, pages 681-692.
    8. Baker, Malcolm & Stein, Jeremy C., 2004. "Market liquidity as a sentiment indicator," Journal of Financial Markets, Elsevier, pages 271-299.
    9. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
    10. N. Gregory Mankiw, 1985. "Small Menu Costs and Large Business Cycles: A Macroeconomic Model of Monopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 100(2), pages 529-538.
    11. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, pages 163-185.
    12. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, pages 1097-1118.
    13. Massimiliano Croce, Mariano, 2014. "Long-run productivity risk: A new hope for production-based asset pricing?," Journal of Monetary Economics, Elsevier, pages 13-31.
    14. Daniel Aaronson & Sumit Agarwal & Eric French, 2012. "The Spending and Debt Response to Minimum Wage Hikes," American Economic Review, American Economic Association, pages 3111-3139.
    15. Olivier Coibion & Yuriy Gorodnichenko, 2012. "What Can Survey Forecasts Tell Us about Information Rigidities?," Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 116-159.
    16. Sergio Rebelo & Martin Eichenbaum & Craig Burnside, 2012. "Understanding Booms and Busts in Housing Markets," 2012 Meeting Papers 114, Society for Economic Dynamics.
    17. Terrance Odean, 1998. "Volume, Volatility, Price, and Profit When All Traders Are Above Average," Journal of Finance, American Finance Association, vol. 53(6), pages 1887-1934, December.
    18. Gadi Barlevy, 2005. "The cost of business cycles and the benefits of stabilization," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-49.
    19. George A. Akerlof & Janet L. Yellen, 1985. "A Near-Rational Model of the Business Cycle, with Wage and Price Inertia," The Quarterly Journal of Economics, Oxford University Press, vol. 100(Supplemen), pages 823-838.
    20. Kent D. Daniel, 2001. "Overconfidence, Arbitrage, and Equilibrium Asset Pricing," Journal of Finance, American Finance Association, vol. 56(3), pages 921-965, June.
    21. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, pages 157-175.
    22. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1990. "The Stock Market and Investment: Is the Market a Sideshow?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, pages 157-216.
    23. Michael Woodford, 2010. "Robustly Optimal Monetary Policy with Near-Rational Expectations," American Economic Review, American Economic Association, pages 274-303.
    24. repec:hrv:faseco:30747159 is not listed on IDEAS
    25. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, January.
    26. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "The Size and Incidence of the Losses from Noise Trading," Journal of Finance, American Finance Association, vol. 44(3), pages 681-696, July.
    27. Amador, Manuel & Weill, Pierre-Olivier, 2012. "Learning from private and public observations of othersʼ actions," Journal of Economic Theory, Elsevier, vol. 147(3), pages 910-940.
    28. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, April.
    29. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
    30. Lansing, Kevin J., 2012. "Speculative growth, overreaction, and the welfare cost of technology-driven bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 461-483.
    31. Tille, Cédric & van Wincoop, Eric, 2010. "International capital flows," Journal of International Economics, Elsevier, pages 157-175.
    32. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 2016. "Understanding Booms and Busts in Housing Markets," Journal of Political Economy, University of Chicago Press, vol. 124(4), pages 1088-1147.
    33. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-969, July.
    34. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters,in: THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472 World Scientific Publishing Co. Pte. Ltd..
    35. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, pages 393-408.
    36. Sy-Ming Guu & Kenneth L. Judd, 2001. "Asymptotic methods for asset market equilibrium analysis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), pages 127-157.
    37. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2003. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," The Quarterly Journal of Economics, Oxford University Press, vol. 118(3), pages 969-1005.
    38. Kyle Chauvin & David Laibson & Johanna Mollerstrom, 2011. "Asset Bubbles and the Cost of Economic Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 233-260, August.
    39. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, August.
    40. Bansal, Ravi & Kiku, Dana & Yaron, Amir, 2012. "An Empirical Evaluation of the Long-Run Risks Model for Asset Prices," Critical Finance Review, now publishers, vol. 1(1), pages 183-221, January.
    41. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, pages 239-246.
    42. Stein, Jeremy C, 1987. "Informational Externalities and Welfare-Reducing Speculation," Journal of Political Economy, University of Chicago Press, vol. 95(6), pages 1123-1145, December.
    43. Gilchrist, Simon & Himmelberg, Charles P. & Huberman, Gur, 2005. "Do stock price bubbles influence corporate investment?," Journal of Monetary Economics, Elsevier, pages 805-827.
    44. Tarek A. Hassan & Thomas M. Mertens, 2011. "Market Sentiment: A Tragedy of the Commons," American Economic Review, American Economic Association, pages 402-405.
    45. Raj Chetty, 2012. "Bounds on Elasticities With Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," Econometrica, Econometric Society, vol. 80(3), pages 969-1018, May.
    46. Martin Browning & M. Dolores Collado, 2001. "The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates," American Economic Review, American Economic Association, pages 681-692.
    47. Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, pages 319-337.
    48. Sumit Agarwal & Chunlin Liu & Nicholas S. Souleles, 2007. "The Reaction of Consumer Spending and Debt to Tax Rebates-Evidence from Consumer Credit Data," Journal of Political Economy, University of Chicago Press, pages 986-1019.
    49. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2013. "Consumer Spending and the Economic Stimulus Payments of 2008," American Economic Review, American Economic Association, pages 2530-2553.
    50. Olivier Blanchard & Changyong Rhee & Lawrence Summers, 1993. "The Stock Market, Profit, and Investment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 115-136.
    51. Gilchrist, Simon & Himmelberg, Charles P. & Huberman, Gur, 2005. "Do stock price bubbles influence corporate investment?," Journal of Monetary Economics, Elsevier, pages 805-827.
    52. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    53. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, pages 151-170.
    54. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, pages 959-973.
    55. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-168, February.
    56. Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, pages 186-200.
    57. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, pages 1521-1534.
    58. Sumit Agarwal & Wenlan Qian, 2014. "Consumption and Debt Response to Unanticipated Income Shocks: Evidence from a Natural Experiment in Singapore," American Economic Review, American Economic Association, pages 4205-4230.
    59. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    60. Michael B. Devereux & Alan Sutherland, 2011. "Country Portfolios In Open Economy Macro‐Models," Journal of the European Economic Association, European Economic Association, vol. 9(2), pages 337-369, April.
    61. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, pages 421-436.
    62. George-Marios Angeletos, 2007. "Uninsured Idiosyncratic Investment Risk and Aggregate Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(1), pages 1-30, January.
    63. Andrew Schotter & Keith Weigelt, 1992. "Asymmetric Tournaments, Equal Opportunity Laws, and Affirmative Action: Some Experimental Results," The Quarterly Journal of Economics, Oxford University Press, pages 511-539.
    64. Galeotti, Marzio & Schiantarelli, Fabio, 1994. "Stock Market Volatility and Investment: Do Only Fundamentals Matter?," Economica, London School of Economics and Political Science, vol. 61(242), pages 147-165, May.
    65. Terrance Odean, 1999. "Do Investors Trade Too Much?," American Economic Review, American Economic Association, pages 1279-1298.
    66. Lucas, Robert E, Jr, 1975. "An Equilibrium Model of the Business Cycle," Journal of Political Economy, University of Chicago Press, vol. 83(6), pages 1113-1144, December.
    67. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, pages 421-436.
    68. Brahima Coulibaly & Geng Li, 2006. "Do Homeowners Increase Consumption after the Last Mortgage Payment? An Alternative Test of the Permanent Income Hypothesis," The Review of Economics and Statistics, MIT Press, pages 10-19.
    69. Patton, Andrew J. & Timmermann, Allan, 2010. "Why do forecasters disagree? Lessons from the term structure of cross-sectional dispersion," Journal of Monetary Economics, Elsevier, pages 803-820.
    70. Souleles, Nicholas S., 2000. "College tuition and household savings and consumption," Journal of Public Economics, Elsevier, pages 185-207.
    71. Cochrane, John H, 1989. "The Sensitivity of Tests of the Intertemporal Allocation of Consumption to Near-Rational Alternatives," American Economic Review, American Economic Association, pages 319-337.
    72. Diamond, Douglas W. & Verrecchia, Robert E., 1981. "Information aggregation in a noisy rational expectations economy," Journal of Financial Economics, Elsevier, vol. 9(3), pages 221-235, September.
    73. Yu, Jialin, 2011. "Disagreement and return predictability of stock portfolios," Journal of Financial Economics, Elsevier, vol. 99(1), pages 162-183, January.
    74. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, pages 797-818.
    75. Polk, Christopher & Sapienza, Paola, 2003. "The Real Effects of Investor Sentiment," CEPR Discussion Papers 3826, C.E.P.R. Discussion Papers.
    76. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, pages 2050-2084.
    77. Fernando Alvarez & Urban J. Jermann, 2005. "Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth," Econometrica, Econometric Society, vol. 73(6), pages 1977-2016, November.
    78. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, pages 947-958.
    79. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    80. Christopher Polk & Paola Sapienza, 2009. "The Stock Market and Corporate Investment: A Test of Catering Theory," Review of Financial Studies, Society for Financial Studies, pages 187-217.
    81. LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-574, May.
    82. Jermann, Urban J., 1998. "Asset pricing in production economies," Journal of Monetary Economics, Elsevier, pages 257-275.
    83. Souleles, Nicholas S., 2002. "Consumer response to the Reagan tax cuts," Journal of Public Economics, Elsevier, pages 99-120.
    84. Chang-Tai Hsieh, 2003. "Do Consumers React to Anticipated Income Changes? Evidence from the Alaska Permanent Fund," American Economic Review, American Economic Association, pages 397-405.
    85. Barry Scholnick, 2013. "Consumption Smoothing after the Final Mortgage Payment: Testing the Magnitude Hypothesis," The Review of Economics and Statistics, MIT Press, pages 1444-1449.
    86. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, pages 2050-2084.
    87. Dupor, Bill, 2005. "Stabilizing non-fundamental asset price movements under discretion and limited information," Journal of Monetary Economics, Elsevier, pages 727-747.
    88. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, pages 719-752.
    89. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2007. "Wall Street and Silicon Valley: A Delicate Interaction," NBER Working Papers 13475, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed010:370. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.