Asset Mispricing Due to Cognitive Dissonance

Bernhard Eckwert and Burkhard Drees

No 2005/009, IMF Working Papers from International Monetary Fund

Abstract: The behavior of equity prices is analyzed in a general equilibrium model where agents have preferences not only over consumption but also (implicitly) over their beliefs. To alleviate cognitive dissonance, investors endogenously choose to ignore information that conflicts too much with their ex ante expectations. Depending on the new information that is released, systematic overvaluation and undervaluation of equity prices arise, as well as too much and too little equity price volatility. The distortion in the asset pricing process is closely related to the precision of the information.

Keywords: WP; mover accent (search for similar items in EconPapers)
Pages: 30
Date: 2005-01-01
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Citations: View citations in EconPapers (3)

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