Metanoia and the Market
Advances in Behavioral Finance and Economics, Vol. 1, No. 1, pp. 27-42, Winter 2011
25 Pages Posted: 14 Oct 2008 Last revised: 7 Mar 2011
Date Written: March 5, 2011
Abstract
If investors randomly switch between being rational and irrational, then eventually the market will be half rational and half irrational, even if all investors start off rational, no matter how low the switching probability is. Thus, mispricings can persist even with continued volume between two fundamentally identical investments. Multiple survey results for hypothetical investment scenarios support this metanoia model. In addition, the dynamics of a large market discrepancy in HSBC shares from 1992-1999 are consistent with metanoia. In short, the law of one price will be violated so long as there is any probability of switching: identical assets will have different prices.
Keywords: behavioral, law of one price, irrational, mispricing, arbitrage
JEL Classification: G14, G10, G19
Suggested Citation: Suggested Citation
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