Insensitive Investors
Journal of Finance forthcoming
86 Pages Posted: 26 Jan 2022 Last revised: 25 Apr 2024
There are 2 versions of this paper
Insensitive Investors
Date Written: October 2, 2023
Abstract
We experimentally study the transmission of subjective expectations into actions. Subjects in our experiment report valuations that are far too insensitive to their expectations, relative to the prediction from a frictionless model. We propose that the insensitivity is driven by a noisy cognitive process that prevents subjects from precisely computing asset valuations. The empirical link between subjective expectations and actions becomes stronger as subjective expectations approach rational expectations. Our results highlight the importance of incorporating weak transmission into belief-based asset pricing models. Finally, we discuss how cognitive noise can provide a microfoundation for inelastic demand in the stock market.
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