Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets
71 Pages Posted: 7 Mar 2019 Last revised: 25 Aug 2021
Date Written: August 2021
The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.
Keywords: difference of opinions, optimal expectations, overconfidence
JEL Classification: D8, G1
Suggested Citation: Suggested Citation