The Effect of Naïve Reinforcement Learning in the Stock Market
23 Pages Posted: 7 Apr 2019
Date Written: December 1, 2015
Some investors who are subjected to naïve reinforcement learning create a spread between a stock’s fundamental value and its equilibrium price. Naïve learners are more likely to repurchase a stock previously sold for a gain than one sold for a loss. This causes predictable equilibrium prices. We propose a proxy for the effect of naïve learning and show the profitability of a long-short strategy based on our proxy.
Keywords: naïve reinforcement learning, bahavioral bias, stock market
JEL Classification: G41, C51
Suggested Citation: Suggested Citation