Review of Finance Vol. 13 No. 4 2009
Bounded Rationality and Asset Pricing with Intermediate Consumption
open access
Abstract
We consider a pure exchange economy with incomplete information. Some agents display learning bias and over- or under-react to the arrival of new information. We show under which conditions biased agents survive over a finite horizon. We also study the distribution of irrational agents consumption shares. Irrational agents have a signiÞcant consumption share in the economy when (i) shocks are less persistent (ii) risk aversion is high (iii) volatility of aggregate consumption is high. We also show that agents impact on prices is increasing in their consumption share and conclude that biased agents can signiÞcantly influence equilibrium quantities.
- DOI
- 10.1093/rof/rfn022
- Volume
- 13
- Issue
- 4
- Pages
- 693-725
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref