Public Information and Heuristic Trade
48 Pages Posted: 13 Sep 1998
Date Written: September 1, 1998
We characterize the steady-state equilibrium in which informed traders who exhibit heuristic (i.e., representativeness, as opposed to Bayesian) and Bayesian behaviors achieve the same expected utility. Then, we show how the endogenous, steady-state proportion of heuristic traders is affected by the quality of public information and other exogenous features of our model. Finally, we discuss how the presence of heuristic traders potentially alters the link between improved public disclosure and: market liquidity, the variance in the change in price, and market efficiency.
JEL Classification: M41, G14, G19
Suggested Citation: Suggested Citation