Economics, Econometrics and Finance
3 years ago

Market Mislearning Leads to Over-Reaction and Inelasticity, Study Finds

SSRN Electronic Journal
Partial Equilibrium Thinking in General Equilibrium
Francesca Bastianello, Paul Fontanier

Paper Summary

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The article discusses how traders can make mistakes by learning only from prices and not considering all available information. This leads to overreactions and less flexible markets. The type of mistakes made and the market's rigidity depend on the traders and the quality of new information. Learning only from prices can make mistakes worse and cause markets to be even less flexible.