Asset Mispricing Due to Cognitive Dissonance

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.
Publication date: January 2005
ISBN: 9781451860283
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Finance , Finance , Asset pricing , behavioral finance , cognitive dissonance , investors , stock prices , stock market , stock price , financial economics

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