Insensitive investors

Constantin Charles, Cary Frydman and Mete Kilic

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

JEL-codes: G11 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2024-06-18
New Economics Papers: this item is included in nep-exp, nep-fmk, nep-inv and nep-neu
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Journal of Finance, 18, June, 2024, 79(4), pp. 2473-2503. ISSN: 0022-1082

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:120788

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