Bounded Rationality and Asset Pricing

Berrada, Tony

doi:10.2139/ssrn.485062

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Bounded Rationality and Asset Pricing

Swiss Finance Institute Research Paper No. 06-7

EFMA 2004 Basel Meetings Paper

50 Pages Posted: 13 May 2004

See all articles by Tony Berrada

Tony Berrada

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Date Written: June 2006

Abstract

We consider a pure exchange economy with incomplete information. Some agents in the economy display learning bias and over- or underreact to the arrival of new information. We study, by simulation, the distribution of irrational agents' consumption shares. We find that over a reasonable horizon (50 years) under- or over-reaction has little impact on an agent's consumption share, when parameters of the model are chosen to fit aggregate consumption data in the US. We also show that agents'impact on prices is increasing in their consumption share and conclude that biased agents can significantly influence equilibrium quantities.

Keywords: Bounded rationality, incomplete information, equilibrium

JEL Classification: G12

Suggested Citation: Suggested Citation

Berrada, Tony, Bounded Rationality and Asset Pricing (June 2006). Swiss Finance Institute Research Paper No. 06-7, EFMA 2004 Basel Meetings Paper, Available at SSRN: https://ssrn.com/abstract=485062 or http://dx.doi.org/10.2139/ssrn.485062