Common Information-processing Irrationality as Trade Creator

Bogdan Klishchuk
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Bogdan Klishchuk: HU Berlin

No 255, Rationality and Competition Discussion Paper Series from CRC TRR 190 Rationality and Competition

Abstract: We show that a common (identical across investors) irrationality in information processing can be enough to create nontrivial trade, using one of standard partial-equilibrium environments. We can attribute this trade to their common irrationality because we strip the investors and their circumstances of all heterogeneities but purely age (in a sense experience), make investment horizon age-independent, and keep all information complete. The common irrationality in our model takes the form of a somewhat non-Bayesian information processing. The resulting trade between such essentially identical individuals with the very same irrationality in their information processing can also feature different kinds of mispricing.

Date: 2020-08-25
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