Charles, Constantin ORCID: 0009-0009-2110-1664, Frydman, Cary and Kilic, Mete (2024) Insensitive investors. Journal of Finance, 79 (4). pp. 2473-2503. ISSN 0022-1082
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Abstract
We experimentally study the transmission of subjective expectations into actions. Subjects in our experiment report valuations that are far too insensitive to their expectations, relative to the prediction from a frictionless model. We propose that the insensitivity is driven by a noisy cognitive process that prevents subjects from precisely computing asset valuations. The empirical link between subjective expectations and actions becomes stronger as subjective expectations approach rational expectations. Our results highlight the importance of incorporating weak transmission into belief-based asset pricing models. Finally, we discuss how cognitive noise can provide a microfoundation for inelastic demand in the stock market.
Item Type: | Article |
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Official URL: | https://onlinelibrary.wiley.com/journal/15406261 |
Additional Information: | © 2024 the American Finance Association |
Divisions: | Finance |
Subjects: | H Social Sciences > HG Finance |
JEL classification: | G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions |
Date Deposited: | 17 Nov 2023 16:09 |
Last Modified: | 02 Oct 2024 23:13 |
URI: | http://eprints.lse.ac.uk/id/eprint/120788 |
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