Asset Mispricing Due to Cognitive Dissonance

My favorite concept from this paper: “To alleviate cognitive dissonance, investors endogenously choose to ignore information that conflicts too much with their ex ante expectations.”

Abstract (Via SSRN)

The behavior of equity prices is analyzed in a general equilibrium model where agents have preferences not only over consumption but also (implicitly) over their beliefs. To alleviate cognitive dissonance, investors endogenously choose to ignore information that conflicts too much with their ex ante expectations. Depending on the new information that is released, systematic overvaluation and undervaluation of equity prices arise, as well as too much and too little equity price volatility. The distortion in the asset pricing process is closely related to the precision of the information.

Click Here To Learn About Asset Mispricing Due to Cognitive Dissonance

About Miguel Barbosa

I run this site.

11. August 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

Leave a Reply

Required fields are marked *