The social cost of near-rational investment
By: Tarek A. Hassan, Thomas M. Mertens
Contributors: Mertens, Thomas M.; National Bureau of Economic Research
Series: NBER working paper series -- working paper 17027; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 17027.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "We show that the stock market may fail to aggregate information even if it appears to be efficient and that the resulting decrease in the information content of stock prices may drastically reduce welfare.  We solve a macroeconomic model in which information about fundamentals is dispersed and households make small, correlated errors around their optimal investment policies.  As information aggregates in the market, these errors amplify and crowd out the information content of stock prices.  When stock prices reflect less information, the volatility of stock returns rises.  The increase in volatility makes holding stocks unattractive, distorts the long-run level of capital accumulation, and causes costly (first-order) distortions in the long-run level of consumption"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/21/2011.

Includes bibliographical references.

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