Rational Laymen Versus Over-Confident Experts: Who Survives in the Long-Run?

37 Pages Posted: 14 Mar 2006

See all articles by Nicole Branger

Nicole Branger

University of Muenster - Finance Center Muenster

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Lue Wu

Goethe University Frankfurt - Department of Finance

Date Written: March 1, 2006

Abstract

In this paper we study the equilibrium in a heterogeneous economy with two groups of investors. Over-confident experts incorrectly assume that their signal for the drift of the dividend process is correlated with the true drift, but interpret the signal otherwise perfectly. Rational laymen avoid the experts' error, but their signal is noisier than that received by the experts. We investigate which of these two problems is more severe by computing long-run equilibrium consumption shares for the two groups. Our results indicate that overconfidence might be a more serious problem than limited information processing capability.

Keywords: General Equilibrium, Asset Allocation, Learning, Different Beliefs, Overconfidence

JEL Classification: G11, G12

Suggested Citation

Branger, Nicole and Schlag, Christian and Wu, Lue, Rational Laymen Versus Over-Confident Experts: Who Survives in the Long-Run? (March 1, 2006). EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=890600 or http://dx.doi.org/10.2139/ssrn.890600

Nicole Branger (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 29779 (Phone)
+49 251 83 22867 (Fax)

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/fcm/das-finance-center/details.php?weobjectID=162

Christian Schlag

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Lue Wu

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17-21/Uni-Postbox 77
Frankfurt am Main, 60054
Germany
+49 69 798 28459 (Phone)
+49 69 798 22788 (Fax)

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