Information Processing and Non-Bayesian Learning in Financial Markets

45 Pages Posted: 8 Dec 2012 Last revised: 27 Feb 2015

See all articles by Stefanie Schraeder

Stefanie Schraeder

Department of Finance, University of Vienna

Date Written: March 15, 2014


Ample empirical and experimental evidence documents that individuals place greater weight on information gained through personal experience -- a phenomenon that Tversky and Kahneman (1982) call availability bias. I embed this bias in an overlapping generations equilibrium model in which the period that investors first enter the market establishes the starting point of their experience history. The difference in the individuals' experience leads to heterogeneity among agents and perceived noise trading. The model captures several empirical findings. It explains why returns on high-volume trading days tend to revert. Furthermore, it provides explanations for a high trading volume, a connection between trading volume and volatility, excess volatility, and overreaction and reversal patterns. Consistent with empirical evidence, young investors buy high and sell low, trade frequently, and obtain lower returns. For intraday trading, it predicts a high trading volume around the opening hours, especially for cross-listed stocks.

Keywords: availability bias, overlapping generations model, financial anomalies, behavioral finance, heuristic learning

Suggested Citation

Schraeder, Stefanie, Information Processing and Non-Bayesian Learning in Financial Markets (March 15, 2014). Swiss Finance Institute Research Paper No. 14-14, Available at SSRN: or

Stefanie Schraeder (Contact Author)

Department of Finance, University of Vienna ( email )

+4367760776378 (Phone)

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