Bounded Rationality and Asset Pricing

Preprint
Publisher Website
Google Scholar
  • 1 January 2006
    • preprint
      • Published in RePEc
Abstract
We consider a pure exchange economy with incomplete information. Some agents in the economy display learning bias and over- or underreact to the arrival of new information. We study, by simulation, the distribution of irrational agents’ consumption shares. We find that over a reasonable horizon (50 years) under- or over-reaction has little impact on an agent’s consumption share, when parameters of the model are chosen to fit aggregate consumption data in the US. We also show that agents’impact on prices is increasing in their consumption share and conclude that biased agents can significantly influence equilibrium quantities.
All Related Versions

This publication has 0 references indexed in Scilit: