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Asset Pricing and Asymmetric Reasoning

Elena Asparouhova, Peter Bossaerts, Jon Eguia () and William Zame

Journal of Political Economy, 2015, vol. 123, issue 1, 66 - 122

Abstract: We present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning. We show that under asymmetric reasoning, prices do not reflect all (types of) reasoning. Some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous. If they are ambiguity-averse, these agents become price-insensitive. Results from an experiment show that, consistent with the theory, (i) without aggregate risk, mispricing decreases as the fraction of price-sensitive agents increases; and (ii) with aggregate risk, price-insensitive agents trade to more balanced portfolios.

Date: 2015
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