Rational herd behavior and informationally efficient security prices have long been considered to be mutually exclusive but for exceptional cases. In this paper we describe the conditions on the underlying information structure that are necessary and sufficient for informational herding and...

This paper attempts to provide a substantive introduction to behavioral economics for a general audience, and for introductory and intermediate level students of economics and business administration. 1. Introduction; 2. The Background; 3. Bounded Rationality; 4. Prospect Theory and other major...

Using a theoretical extension of the Friedman and Savage (1948) utility function developed in Bhattacharyya (2003), we predict that for financial assets with negative expected returns, expected return will be a declining and convex function of skewness. Using a sample of U.S. state lottery...

Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors (number of trades, turnover). Approximately 3000...

There are three crucial mathematical system concepts in Finance, which are either being confused or misapplied - uncertainty, complexity and rank. First, the concept of epistemic uncertainty is sufficient for modeling and the concept of probability is unnecessary. This is illustrated by Galton's...

This paper offers a continuous time, general equilibrium model where a risky asset is traded among risk-averse overconfident investors. Two kinds of overconfidence are introduced: investors exhibit relative overconfidence if each investor believes her model is better than others' and aggregate...

This paper examines the role played by uncertainty and sunk costs on the timeseries fluctuations in industry structure as captured by the number of firms and establishments, and concentration. Using an extensive dataset covering 267 U.S. manufacturing industries over a 30-year period, our...

Theoretical models predict that overconfident investors will trade more than rational investors. We directly test this hypothesis by correlating individual overconfidence scores with several measures of trading volume of individual investors (number of trades, turnover). Approximately 3000...

The incomplete information financial economic equilibrium (IIE) literature has been growing at an increasing rate since its inception in the early 1980s. This paper examines issues and concepts essential to understanding, implementing, and testing IIE and understanding its relation to complete...

We show in this paper that bang-bang portfolio strategies where the investor is alternatively 100% in equity and 100% in cash are dynamically inefficient. Our proof of this result is based on a simple second-order stochastic dominance (SSD) argument. It implies that this is true for any decision...