Paper #786

Títol:

Overconfidence and market efficiency with heterogeneous agents

Autors:

Diego Garcia, Francesco Sangiorgi i Branko Urosevic

Data:

Octubre 2004

Resum:

We study financial markets in which both rational and overconfident agents coexist and make endogenous information acquisition decisions. We demonstrate the following irrelevance result: when a positive fraction of rational agents (endogeneously) decides to become informed in equilibrium, prices are set as if all investors were rational, and as a consequence the overconfidence bias does not aect informational efficiency, price volatility, rational traders� expected profits or their welfare. Intuitively, as overconfidence goes up, so does price infornativeness, which makes rational agents cut their information acquisition activities, effectively undoing the standard effect of more aggressive trading by the overconfident.

Paraules clau:

Partially revealing equilibria, overconfidence, rational expectations, information

Codis JEL:

D80, G10

Àrea de Recerca:

Finances i Comptabilitat

Publicat a:

Economic Theory, Springer, vol. 30(2), pp. 313-336, February, 2007

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