Market Sentiment: A Tragedy of the Commons
Tarek A. Hassan, Thomas M. Mertens
American Economic Review · 2011 · Volume 101 · Issue 3
Abstract
We present a model in which investors decide whether or to what degree they want to allow their behavior to be influenced by "market sentiment." Investors who choose to insulate their decisions from market sentiment earn higher expected returns, but incur a small mental cost. We show that if information is moderately dispersed across investors, even a very small mental cost may result in a significant amount of sentiment in equilibrium: Individuals who choose to be swayed by sentiment increase uncertainty about the future and make it less costly for others to be swayed by sentiment as well.
Keywords
Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making, Personal Finance, Search, Learning, Information and Knowledge, Communication, Belief
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