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Market-Based Solutions to Vital Economic Issues
Aug 1, 2021

Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets


The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.

Note: Research papers posted on SSRN, including any findings, may differ from the final version chosen for publication in academic journals.

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