Bounded Rationality and Asset Pricing
50 Pages Posted: 13 May 2004
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
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