Abstract

The authors present a model of portfolio allocation by noise traders with incorrect expectations about return variances. For such misperceptions, noise traders who do not affect prices can earn higher expected returns than rational investors with similar risk aversion. Moreover, such noise traders can come to dominate the market in that the probability that they eventually have a high share of total wealth is close to one. Noise traders come to dominate despite their taking of excessive risk and their higher consumption. The authors conclude that the case against their long-run viability is not as clear-cut as is commonly supposed.

Keywords

PortfolioEconomicsNoise (video)Risk aversion (psychology)Consumption (sociology)Financial marketPortfolio allocationFinancial economicsMonetary economicsExpected utility hypothesisFinance

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Publication Info

Year
1988
Type
preprint
Citations
5
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Closed

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J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers et al. (1988). The Survival of Noise Traders in Financial Markets. . https://doi.org/10.3386/w2715

Identifiers

DOI
10.3386/w2715