Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets

71 Pages Posted: 7 Mar 2019 Last revised: 25 Aug 2021

See all articles by Snehal Banerjee

Snehal Banerjee

University of California, San Diego (UCSD) - Rady School of Management

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Naveen Gondhi

INSEAD

Date Written: August 2021

Abstract

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

Banerjee, Snehal and Davis, Jesse and Gondhi, Naveen, Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets (August 2021). Available at SSRN: https://ssrn.com/abstract=3335257 or http://dx.doi.org/10.2139/ssrn.3335257

Snehal Banerjee (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

Jesse Davis

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Naveen Gondhi

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

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