Speculative Behavior and Heterogeneous Expectations: Theory and Evidence

This paper demonstrates that the optimal willingness to pay for a stock is the payoff from holding the stock for one period when investors have different expectations, and that the willingness to pay can be represented as the sum of the expected present value of future dividends and the expected present value of the gap between the future equilibrium price and willingness to pay. This speculative behavior based on the awareness of heterogeneity in expectations is supported by the volatility test and the predictability of the dispersion in expectations across investors.