Speculative Investor Behavior and Learning

As traders learn about the true distribution of some asset's dividends, a speculative premium occurs as each trader anticipates the possibility of re-selling the asset to another trader before complete learning has occurred. Reasonable ignorance priors lead to large bubbles during the learning process. This phenomenon explains a paradox concerning the pricing of initial public offerings. The result casts light on the significance of the common prior assumption in economic models.

Download Paper

Paper Number
95-13
Year
1995
Authored by