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American Economic Review: Vol. 101 No. 3 (May 2011)

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Market Sentiment: A Tragedy of the Commons

Article Citation

Hassan, Tarek A., and Thomas M. Mertens. 2011. "Market Sentiment: A Tragedy of the Commons." American Economic Review, 101(3): 402-05.

DOI: 10.1257/aer.101.3.402

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.

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Authors

Hassan, Tarek A. (U Chicago)
Mertens, Thomas M. (NYU)

JEL Classifications

D03: Behavioral Economics: Underlying Principles
D14: Personal Finance
D83: Search; Learning; Information and Knowledge; Communication; Belief


American Economic Review



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