Divergent Expectations: When Investors Agree to Disagree

24 Pages Posted: 8 Mar 2007

See all articles by Michael S. Pagano

Michael S. Pagano

Villanova University - Villanova School of Business

Paul Davis

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF)

Robert A. Schwartz

Baruch College - CUNY

Date Written: January 27, 2007

Abstract

Investors who possess the same information and interpret it differently are said to have divergent (as distinct from) homogeneous expectations. Financial economists have widely frowned on the divergent expectations assumption. Nevertheless, this assumption describes reality and is critically important. It paves the way to understanding price and quantity discovery as major functions of a marketplace, and it goes to the heart of an important question - what drives trading and why does market structure matter? Many issues concerning market structure and market structure regulation should be analyzed in a divergent expectations context. This paper considers what is involved in terms of market participants and public policy.

Keywords: market microstructure, asset valuation, heterogeneous expectations, theory

JEL Classification: G14, G12, D82, D83, D84

Suggested Citation

Pagano, Michael S. and Davis, Paul and Schwartz, Robert A., Divergent Expectations: When Investors Agree to Disagree (January 27, 2007). Available at SSRN: https://ssrn.com/abstract=967857 or http://dx.doi.org/10.2139/ssrn.967857

Michael S. Pagano (Contact Author)

Villanova University - Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
(610) 519-4389 (Phone)

HOME PAGE: http://www90.homepage.villanova.edu/michael.pagano

Paul Davis

Teachers Insurance and Annuity Association College Retirement Equities Fund (TIAA-CREF) ( email )

730 Third Avenue
New York, NY 10017-3206
United States

Robert A. Schwartz

Baruch College - CUNY ( email )

Zicklin School of Business
17 Lexington Avenue
New York, NY 10010
United States
646-312-3467 (Phone)
646-312-3530 (Fax)

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