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

See all articles by Philip Maymin

Philip Maymin

Fairfield University - Charles F. Dolan School of Business; Athletes Unlimited

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

Maymin, Philip, Metanoia and the Market (March 5, 2011). Advances in Behavioral Finance and Economics, Vol. 1, No. 1, pp. 27-42, Winter 2011, Available at SSRN: https://ssrn.com/abstract=1281693

Philip Maymin (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

N. Benson Road
Fairfield, CT 06824
United States

Athletes Unlimited ( email )

888 7th Avenue
New York, NY 10106
United States

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