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Home | Events Archive | Asset Pricing In a World of Imperfect Foresight

Asset Pricing In a World of Imperfect Foresight

  • Series
  • Speaker(s)
    Peter Bossaerts (University of Melbourne, Australia and Cambridge University, United Kingdom)
  • Field
    Finance, Finance
  • Location
    Tinbergen Institute Amsterdam, room 1.01
  • Date and time

    April 13, 2022
    12:45 - 14:00

We consider a canonical asset pricing model, where agents with quadratic preferences are allowed to re-trade a limited set of securities over multiple periods, after which these securities expire, and agents consume their liquidation values. A key assumption in this model is that agents have perfect foresight: for all future contingencies, they correctly foresee the corresponding equilibrium prices. We show that, under myopia, prices generically are as if agents had perfect foresight. Yet their choices are wrong, because of neglected re-trading opportunities. Myopia is defined to be a benign form of narrow framing: agents opt to ignore that they can re-trade in the future, though they do take into account future contingent endowments. In an experiment, we find both prices and choices to be consistent with myopia.