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Asset Pricing and Asymmetric Reasoning

Author

Listed:
  • Elena Asparouhova
  • Peter Bossaerts
  • Jon Eguia
  • William Zame

Abstract

We present a theory and experimental evidence on pricing and portfolio choices under asymmetric reasoning. We show that under asymmetric reasoning, prices do not reflect all (types of) reasoning. Some agents who observe prices that cannot be reconciled with their reasoning switch from perceiving the environment as risky to perceiving it as ambiguous. If they are ambiguity-averse, these agents become price-insensitive. Results from an experiment show that, consistent with the theory, (i) without aggregate risk, mispricing decreases as the fraction of price-sensitive agents increases; and (ii) with aggregate risk, price-insensitive agents trade to more balanced portfolios.

Suggested Citation

  • Elena Asparouhova & Peter Bossaerts & Jon Eguia & William Zame, 2015. "Asset Pricing and Asymmetric Reasoning," Journal of Political Economy, University of Chicago Press, vol. 123(1), pages 66-122.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/679283
    DOI: 10.1086/679283
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    10. Andrea Albertazzi & Friederike Mengel & Ronald Peeters, 2021. "Benchmarking information aggregation in experimental markets," Economic Inquiry, Western Economic Association International, vol. 59(4), pages 1500-1516, October.
    11. Marco Mantovani & Antonio Filippin, 2024. "When do prediction markets return average beliefs? Experimental evidence," Working Papers 532, University of Milano-Bicocca, Department of Economics.
    12. Frederik Bossaerts & Nitin Yadav & Peter Bossaerts & Chad Nash & Torquil Todd & Torsten Rudolf & Rowena Hutchins & Anne-Louise Ponsonby & Karl Mattingly, 2022. "Price Formation in Field Prediction Markets: the Wisdom in the Crowd," Papers 2209.08778, arXiv.org.
    13. Nihad Aliyev, 2019. "Financial Markets with Multidimensional Uncertainty," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2019, January-A.
    14. Karl H.Schlag, 2015. "Who gives Direction to Statistical Testing? Best Practice meets Mathematically Correct Tests," Vienna Economics Papers 1512, University of Vienna, Department of Economics.
    15. Heinke, Steve & Olschewski, Sebastian & Rieskamp, Jörg, 2022. "Experiences and Asset Price Dynamics," VfS Annual Conference 2022 (Basel): Big Data in Economics 264017, Verein für Socialpolitik / German Economic Association.
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    19. Zhong, Zhuo, 2016. "Reducing opacity in over-the-counter markets," Journal of Financial Markets, Elsevier, vol. 27(C), pages 1-27.

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