Individuals Neglect the Informational Role of Prices: Evidence from the Stock Market

66 Pages Posted: 16 Nov 2017 Last revised: 30 Mar 2018

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Rodrigo De-Losso

University of Sao Paulo (USP) - Department of Economics

Bruno Giovannetti

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Date Written: March 26, 2018

Abstract

To explain the high levels of speculative trade observed in stock markets, recent theoretical studies such as Eyster, Rabin, and Vayanos (2018) assume that some investors neglect that stock prices contain information. Favorable evidence to this hypothesis comes from lab experiments. Instead, we use real market data to show that individual investors neglect that prices contain information. Our identification strategy uses two distinct events which generate “fictitious price falls.” The first is the mechanical stock price adjustment on ex-dividend dates. The second explores the so-called left-digit effect, the well-documented empirical fact that individuals disproportionally focus on left digits.

Keywords: individual investors, cursed beliefs, contrarian behavior, trading volume, left-digit effect

JEL Classification: G11, G12, G14, G40, D84

Suggested Citation

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Individuals Neglect the Informational Role of Prices: Evidence from the Stock Market (March 26, 2018). Available at SSRN: https://ssrn.com/abstract=3068390 or http://dx.doi.org/10.2139/ssrn.3068390

Fernando Chague

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

Rodrigo De-Losso

University of Sao Paulo (USP) - Department of Economics ( email )

Av. Prof. Luciano Gualberto 908
Sao Paulo SP, 05508-900
Brazil
551130916070 (Phone)

Bruno Giovannetti (Contact Author)

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

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