A Model of Persuasion - With Implications for Financial Markets

Peter DeMarzo, Dimitri Vayanos and Jeffrey Zwiebel
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Jeffrey Zwiebel: Stanford University

No 1635, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: We propose a model of the phenomenon of persuasion. We argue that individual beliefs evolve in a way that overweights the opinions and information of individuals whom they "listen to" relative to other individuals. Such agents can be understood to be acting as though they believe they listen to a representative sample of the individuals with valuable information, even though they may not. We analyze dynamics and convergence of beliefs, characterizing when agents' beliefs converge over time to the same beliefs, and when they instead diverge. Convergent beliefs can be characterized as the weighted average of agents' initial beliefs, and these weights can be interpreted as a measure of ``influence.'' We then explore implications in an asset trading setting. Here we demonstrate that agents profit from being influential as well as being accurate. When agents' choice of whom to listen to is endogenous, we show that an individual's influence can be persistent, even though the individual may be inaccurate.

Date: 2000-08-01
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