Asset Mispricing Due to Cognitive Dissonance

Author/Editor:

Bernhard Eckwert ; Burkhard Drees

Publication Date:

January 1, 2005

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

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.

Series:

Working Paper No. 05/9

Subject:

English

Publication Date:

January 1, 2005

ISBN/ISSN:

9781451860283/1018-5941

Stock No:

WPIEA2005009

Format:

Paper

Pages:

30

Please address any questions about this title to publications@imf.org