We extend Kyle's (1985) model of insider trading to the case where liquidity provided by noise traders follows a general stochastic process. Even though the level of noise trading volatility is observable, in equilibrium, measured price impact is stochastic. If noise trading volatility is...

We estimate the relative contribution of recursive preferences versus adaptive learning in accounting for the tail thickness of price–dividends/rents ratios. We find that both of these sources of volatility account for volatility in liquid (stocks) but not illiquid (housing) assets.

We examine the role of generalized constant gain stochastic gradient (SGCG) learning in generating large deviations of an endogenous variable from its rational expectations value. We show analytically that these large deviations can occur with a frequency associated with a fat tailed...

Previous work on the Dunning–Kruger effect has shown that poor performers often show little insight into the shortcomings in their performance, presumably because they suffer a double curse. Deficits in their knowledge prevent them from both producing correct responses and recognizing that the...

The unskilled-and-unaware problem describes a negative relationship between one’s skill level and self-assessment bias: the less skilled are, on average, more unaware of the absolute and relative quality of their performance. In this paper, we study whether, and to what extent, the...

We study how investors respond to inflation combining a customized survey experiment with trading data at a time of historically high inflation. Investors' beliefs about the stock return-inflation relation are very heterogeneous in the cross section and on average too optimistic. Moreover, many...

The purpose in this letter is to demonstrate, employing two parametric forms of the Markowitz model of utility, that heterogeneity of preferences of Markowitz agents can contribute towards an explanation of why lotteries typically have multiple rather than single prizes.

We demonstrate theoretically and illustrate the implications of assuming power utility when the true function is of the expo-power form. Empirical results can appear to be consistent with cumulative prospect theory when they are in fact generated from a Markowitz model.

The aim of this study was to explore the occurrence of the overconfidence bias and the conjunction fallacy in betting behavior among frequent and sporadic bettors and to test whether it was influenced by the task format (probability vs. frequencies). Frequent bettors (N=67) and sporadic bettors...

During the night of April 14, 1912, the RMS Titanic collided with an iceberg on her maiden voyage. Two hours and 40 minutes later she sank, resulting in the loss of 1,501 lives—more than two-thirds of her 2,207 passengers and crew. This remains one of the deadliest peacetime maritime disasters...