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Bounded Rationality and Asset Pricing

Tony Berrada

No 06-07, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We consider a pure exchange economy with incomplete information. Some agents in the economy display learning bias and over- or underreact to the arrival of new information. We study, by simulation, the distribution of irrational agents’ consumption shares. We find that over a reasonable horizon (50 years) under- or over-reaction has little impact on an agent’s consumption share, when parameters of the model are chosen to fit aggregate consumption data in the US. We also show that agents’impact on prices is increasing in their consumption share and conclude that biased agents can significantly influence equilibrium quantities.

Keywords: Bounded rationality; incomplete information; equilibrium (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2006-06
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0607

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