Individuals Neglect the Informational Role of Prices: Evidence from the Stock Market
66 Pages Posted: 16 Nov 2017 Last revised: 30 Mar 2018
Date Written: March 26, 2018
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: Suggested Citation