Investor Psychology in Capital Markets: Evidence and Policy Implications
Kent D. Daniel
Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
Siew Hong Teoh
University of California - Paul Merage School of Business
Dice Center WP 2001-10
We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government's relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option- setting policies. Especially, government should avoid actions that exacerbate investor biases.
Number of Pages in PDF File: 94
JEL Classification: G12, G14, G18, G28, G38, M41working papers series
Date posted: August 14, 2001
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