No abstract

A lot of attention has been given to behavioral models and their abilities to explain stylized facts in asset pricing. The recent market crashes and suspicions of gross overvaluation have also brought to the forefront worries about the impact of irrational traders. A question that arises when considering models with irrational agents is whether they can survive in the market when confronted to rational agents. In a recent paper Kogan, Ross, Wang and Westerfield (2002) show that when agents have utility over terminal consumption only, they can impact prices even when their wealth share is negligeable. First, we show here that the introduction of intermediate consumption considerably alters this conclusion. Namely, irrational agents with low consumption share have a far smaller impact than in the no-intermediate consumption case. Second, we consider the impact of biased learning rules in a context of incomplete information, and study through simulation the distribution of irrational agents ' consumption shares. We find that over a reasonable horizon (50 years) under and over reaction have little impact on an agent's consumption share.