Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/208075 
Year of Publication: 
2019
Series/Report no.: 
Discussion Paper No. 175
Publisher: 
Ludwig-Maximilians-Universität München und Humboldt-Universität zu Berlin, Collaborative Research Center Transregio 190 - Rationality and Competition, München und Berlin
Abstract: 
Arguing that in the real world relatively optimistic inexperienced investors are prey for relatively pessimistic veteran traders, we formalize this intuitive conjecture as a proven proposition in a simple model. This agreement to disagree leads to a perpetual bubble, in which more experienced, but less optimistic, investors keep selling overpriced assets to less experienced traders. As in a fraction of the uniform-experience literature, lack of short-selling makes room for the success of such bubble schemes. This previous literature did not allow for persistent effects of experience on beliefs and, instead, relied on more direct assumptions of belief heterogeneity. Although we map experience into beliefs in a specific way, the intuition behind the perpetual bubble involves the above-mentioned disagreement patterns, not belief formation itself.
Subjects: 
speculative trade
price bubble
experience
optimism
belief heterogeneity
non-Bayesian learning
short-selling
JEL: 
D8
D9
G1
G4
Document Type: 
Working Paper

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