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http://ssrn.com/abstract=1703318
 
 

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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


New York University (NYU) - Department of Finance

April 10, 2014

NYU Working Paper No. 2451/29843

Abstract:     
We show that the stock market may fail to aggregate information even if it appears to be efficient; the resulting collapse in the dissemination of information 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 perceived and the actual volatility of stock returns rise. This increase in financial risk 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: 69

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Date posted: November 8, 2010 ; Last revised: April 11, 2014

Suggested Citation

Hassan, Tarek A. and Mertens, Thomas M., The Social Cost of Near-Rational Investment (April 10, 2014). NYU Working Paper No. 2451/29843. Available at SSRN: http://ssrn.com/abstract=1703318

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
New York University (NYU) - Department of Finance ( email )
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
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