Insensitive Investors

Journal of Finance forthcoming

86 Pages Posted: 26 Jan 2022 Last revised: 25 Apr 2024

See all articles by Constantin Charles

Constantin Charles

London School of Economics & Political Science (LSE) - Department of Finance

Cary Frydman

University of Southern California - Marshall School of Business

Mete Kilic

University of Southern California - Marshall School of Business

Multiple version iconThere are 2 versions of this paper

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.

Suggested Citation

Charles, Constantin and Frydman, Cary and Kilic, Mete, Insensitive Investors (October 2, 2023). Journal of Finance forthcoming, Available at SSRN: https://ssrn.com/abstract=3971082 or http://dx.doi.org/10.2139/ssrn.3971082

Constantin Charles (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Cary Frydman

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Mete Kilic

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

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