Feedback and the success of irrational investors |
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| Authors: | David Hirshleifer Avanidhar Subrahmanyam Sheridan Titman |
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| Affiliation: | 1. Fisher College of Business, The Ohio State University, Columbus, OH 43210-1144, USA;2. Anderson Graduate School of Management, University of California, Los Angeles, California, 90095, USA;3. College of Business Administration, University of Texas, Austin, Texas, 78712, USA |
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| 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. |
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| Keywords: | G14 G12 G19 |
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