Can an overconfident insider coexist with a representativeness heuristic insider?

Hong Liu and Sarina Du

Economic Modelling, 2016, vol. 54, issue C, 170-177

Abstract: This paper develops an insider trading model that incorporates the presence of rational, overconfident, and representativeness heuristic insiders. We find that the heuristic insider and overconfident insider trade more aggressively on their information than the rational insider, and that therefore, a higher probability exists for them to earn more profits. Furthermore, both higher heuristic bias of the heuristic insider and greater overconfidence of the overconfident insider lead to less expected profit for the rational insider and less expected loss for the noise trader. Moreover, in an equilibrium, both higher heuristic bias and greater overconfidence of an insider lead to a more efficient and stable market.

Keywords: Rational insider; Overconfident insider; Representativeness heuristic insider; Market maker (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:54:y:2016:i:c:p:170-177

DOI: 10.1016/j.econmod.2015.12.032

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