Asset Mispricing Due to Cognitive Dissonance
January 1, 2005
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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.
Subject: Asset prices, Price structures, Securities markets, Stock markets, Stocks
Keywords: mover accent, WP
Pages:
30
Volume:
2005
DOI:
Issue:
009
Series:
Working Paper No. 2005/009
Stock No:
WPIEA2005009
ISBN:
9781451860283
ISSN:
1018-5941
