Feedback and the success of irrational investors☆

David Hirshleifer; Avanidhar Subrahmanyam; Sheridan Titman

doi:10.1016/j.jfineco.2005.05.006

Journal of Financial Economics Vol. 81 No. 2 2006

Feedback and the success of irrational investors☆

David Hirshleifer^1,2; Avanidhar Subrahmanyam³; Sheridan Titman⁴

¹ Fisher College · ² The Ohio State University · ³ University of California, Los Angeles · ⁴ The University of Texas at Austin

Abstract

We provide a model in which irrational investors trade based upon considerations that have no inherent connection to fundamentals. However, trading activity affects market prices, and because of feedback from security prices to cash flows, the irrational trades influence underlying cash flows. As a result, irrational investors can, in some situations, earn abnormal (i.e., risk-adjusted) profits that can exceed the abnormal profits of rational informed investors. Although the trading of irrational investors cause prices to deviate from fundamental values, stock prices follow a random walk.

DOI: 10.1016/j.jfineco.2005.05.006
Volume: 81
Issue: 2
Pages: 311-338
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Feedback and the success of irrational investors☆

Abstract

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