Overconfidence and market efficiency with heterogeneous agents

Diego Garcia, Francesco Sangiorgi and Branko Urosevic

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: 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 a ect 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.

Keywords: Partially revealing equilibria; overconfidence; rational expectations; information (search for similar items in EconPapers)
JEL-codes: D80 G10 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-fin
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Overconfidence and Market Efficiency with Heterogeneous Agents (2007)
Working Paper: Overconfidence and Market Efficiency with Heterogeneous Agents (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:786

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