We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especially

The paper shows that the buy or sell recommendations of security analysts have a significant positive influence on the recommendations of the next two analysts. This influence can be traced to short-lived information in the most recent revisions. In contrast, the influence of the prevailing consensus is not stronger if the consensus accurately forecasts subsequent stock price movements. This indicates consensus herding consistent with models in which analysts herd based on little information. The consensus also has a stronger influence when market conditions are favorable. The resulting poorer information aggregation could cause bull markets to be intrinsically more "fragile" (e.g., Bikhchandani et al., J. Political Economy 100(5) (1992) 992-1026).

This paper explores how Bayes-rational individuals learn sequentially from the discrete actions of others. Unlike earlier informational herding papers, we admit heterogeneous preferences. Not only may type-specific `herds' eventually arise, but a new robust possibility emerges: confounded learning. Beliefs may converge to a limit point where history oers no decisive lessons for anyone, and each type's actions forever nontrivially split between two actions. To verify that our identied limit outcomes do arise, we exploit the Markov-martingale character of beliefs. Learning dynamics are stochastically stable near a fixed point in many Bayesian learning models like this one.

This paper studies what determines group formation and the degree of participation when the population is heterogeneous, both in terms of income and race or ethnicity. We are especially interested in whether and how much the degree of heterogeneity in communities influences the amount of participation in different types of groups. Using survey data on group membership and data on U. S. localities, we flnd that, after controlling for many individual characteristics, participation in social activities is significantly lower in more unequal and in more racially or ethnically fragmented localities. We also find that those individuals who express views against racial mixing are less prone to participate in groups the more racially heterogeneous their community is. These results are consistent with our model of group formation. I.

This paper explains why seemingly irrational overconfident behavior can persist. Information aggregation is poor in groups in which most individuals herd. By ignoring the herd, the actions of overconfident individuals (“entrepreneurs”) convey their private information. However, entrepreneurs make mistakes and thus die more frequently. The socially optimal proportion of entrepreneurs trades off the positive information externality against high attrition rates of entrepreneurs, and depends on the size of the group, on the degree of overconfidence, and on the accuracy of individuals ’ private information. The stationary distribution trades off the fitness of the group against the fitness of overconfident individuals. Starting any company is really hard to do, so you can’t be so smart that it occurs to you that it can’t be done.

Abstract not found

Privately informed individuals speak openly in front of other members of a committee about the desirability of a public decision. Each individual wishes to appear well informed. For any given order of speech, committee members may herd by suppressing their true information. With individuals of heterogeneous expertise, optimizing over the order of speech can improve the extraction of information, but not perfectly so. It is not always optimal to use the common anti-seniority rule whereby experts speak in order of increasing expertise. A committee with more able experts may be afflicted by greater herding problems, yielding a worse outcome.

We show that a class of microeconomic behavioral models with interacting agents, derived from Kirman (1991, 1993), can replicate the empirical long-memory properties of the two first conditional moments of financial time series. The essence of these models is that the forecasts and thus the desired trades of the individuals in the markets are influenced, directly, or indirectly by those of the other participants. These "field effects" generate "herding" behaviour which affects the structure of the asset price dynamics. The series of returns generated by these models display the same empirical properties as financial returns: returns are I(0), the series of absolute and squared returns display strong dependence, while the series of absolute returns do not display a trend. Furthermore, this class of models is able to replicate the common long-memory properties in the volatility and co-volatility of financial time series, revealed by Teyssière (1997, 1998a). These properties are investigated by using various model independent tests and estimators, i.e., semiparametric and nonparametric, introduced by Lo (1991), Kwiatkowski, Phillips, Schmidt and Shin (1992), Robinson (1995), Lobato and Robinson (1998), Giraitis, Kokoszka Leipus and Teyssière (2000, 2001). The relative performance of these tests and estimators for long-memory in a non-standard data generating process is then assessed.

A questionnaire survey was conducted to explore how people think about inflation, and what real problems they see it as causing. With results from 677 people, comparisons were made among people in the U.S., Germany, and Brazil, between young and old, and between economists and non-economists. Among noneconomists in all countries, the largest concern with inflation appears to be that it lowers people's standard of living. Non-economists appear often to believe in a sort of sticky-wage model, by which wages do not respond to inflationary shocks, shocks which are themselves perceived as caused by certain people or institutions acting badly. This standard of living effect is not the only perceived cost of inflation among non-economists: other perceived costs are tied up with issues of exploitation, political instability, loss of morale, and damage to national prestige. The most striking differences between groups studied were between economists and non-economists. There were al...

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