Abstract

http://ssrn.com/abstract=1106347
 
 

References (121)



 
 

Citations (7)



 


 



The Social Cost of Near-Rational Investment


Tarek A. Hassan


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Thomas M. Mertens


Federal Reserve Bank of San Francisco

May 10, 2014

AFA 2012 Chicago Meetings Paper

Abstract:     
We show that the stock market may fail to aggregate information even if it appears to be efficient and that the resulting decrease in the information content of stock prices may drastically reduce welfare. We solve a macroeconomic model in which information about fundamentals is dispersed and households make small, correlated errors around their optimal investment policies. As information aggregates in the market, these errors amplify and crowd out the information content of stock prices. When stock prices reflect less information, the volatility of stock returns rises. The increase in volatility makes holding stocks unattractive, distorts the long-run level of capital accumulation, and causes costly (first-order) distortions in the long-run level of consumption.

Number of Pages in PDF File: 70

Keywords: Near-rationality, investment, capital accumulation

JEL Classification: E62, G11, O16


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Date posted: March 18, 2008 ; Last revised: January 11, 2016

Suggested Citation

Hassan, Tarek A. and Mertens, Thomas M., The Social Cost of Near-Rational Investment (May 10, 2014). AFA 2012 Chicago Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1106347 or http://dx.doi.org/10.2139/ssrn.1106347

Contact Information

Tarek Alexander Hassan (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://faculty.chicagobooth.edu/tarek.hassan/index.html
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Thomas M. Mertens
Federal Reserve Bank of San Francisco ( email )
101 Market Street
San Francisco, CA 94105
United States
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