Massari, Filippo (2020) Under-reaction: Irrational behavior or robust response to model misspecification?

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Abstract

Under-reaction is a robust response to model misspecification rewarded by financial markets, rather than an “irrational” attitude that leads to extinction. I show that under-reacting rules guarantee predictions as accurate as Bayes’ in well-specified learning problems and beat Bayes’ in many misspecified learning environments. Therefore, when a Bayesian agent trades with an under-reacting agent with the same information, there are no paths on which the under-reacting agent loses all his wealth against the Bayesian, while there is a large class of misspecified learning settings in which the Bayesian agent loses all his wealth against the under-reacting agent.

Item Type:	Article
Faculty \ School:	Faculty of Social Sciences > School of Economics
Related URLs:	https://papers.ssrn.com/sol3/papers.cfm?...
Depositing User:	LivePure Connector
Date Deposited:	23 Jul 2020 23:49
Last Modified:	23 Jul 2020 23:49
URI:	https://ueaeprints.uea.ac.uk/id/eprint/76262
DOI:

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