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Common Information-processing Irrationality as Trade Creator

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  • Klishchuk, Bogdan

    (HU Berlin)

Abstract

We show that a common (identical across investors) irrationality in information processing can be enough to create nontrivial trade, using one of standard partial-equilibrium environments. We can attribute this trade to their common irrationality because we strip the investors and their circumstances of all heterogeneities but purely age (in a sense experience), make investment horizon age-independent, and keep all information complete. The common irrationality in our model takes the form of a somewhat non-Bayesian information processing. The resulting trade between such essentially identical individuals with the very same irrationality in their information processing can also feature different kinds of mispricing.

Suggested Citation

  • Klishchuk, Bogdan, 2020. "Common Information-processing Irrationality as Trade Creator," Rationality and Competition Discussion Paper Series 255, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:255
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