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Market Sentiment: A Tragedy of the CommonsTarek A. HassanUniversity of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) Thomas M. MertensNew York University (NYU) - Department of Finance January 17, 2011 Fama-Miller Working Paper Chicago Booth Research Paper No. 11-07 Abstract: We present a model with dispersed information in which investors decide whether or to what degree they want to allow their behavior to be influenced by "market sentiment". Investors who choose to insulate their decision from market sentiment earn higher expected returns, but incur a small mental cost. We show that if information is moderately dispersed across investors, even a very small mental cost (on the order of 0.001% of consumption) may generate a significant amount of sentiment in equilibrium: Individuals who choose to be swayed by sentiment increase uncertainty about the future and make it less costly for others to be swayed by sentiment as well. Market sentiment thus emerges as a tragedy of the commons.
Number of Pages in PDF File: 6 Keywords: Noisy Rational Expectations, Sentiment, Dispersed Information JEL Classification: D8, G11, G14 working papers seriesDate posted: December 19, 2010 ; Last revised: July 29, 2011Suggested CitationContact Information
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