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Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets

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  • SNEHAL BANERJEE
  • JESSE DAVIS
  • NAVEEN GONDHI

Abstract

The psychology literature documents that individuals derive current utility from their beliefs about future events. We show that, as a result, investors in financial markets choose to disagree about both private information and price information. When objective price informativeness is low, each investor dismisses the private signals of others and ignores price information. In contrast, when prices are sufficiently informative, heterogeneous interpretations arise endogenously: most investors ignore prices, while the rest condition on it. Our analysis demonstrates how observed deviations from rational expectations (e.g., dismissiveness, overconfidence) arise endogenously, interact with each other, and vary with economic conditions.

Suggested Citation

  • Snehal Banerjee & Jesse Davis & Naveen Gondhi, 2024. "Choosing to Disagree: Endogenous Dismissiveness and Overconfidence in Financial Markets," Journal of Finance, American Finance Association, vol. 79(2), pages 1635-1695, April.
    • Handle: RePEc:bla:jfinan:v:79:y:2024:i:2:p:1635-1695
    DOI: 10.1111/jofi.13311
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