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Investor psychology in capital markets: evidence and policy implications

By Kent Daniel, David Hirshleifer and Siew Hong Teoh


We review extensive evidence about how psychological biases affect investor behavior and prices. Systematic mispricing probably causes substantial resource misallocation. We argue that limited attention and overconfidence cause investor credulity about the strategic incentives of informed market participants. However, individuals as political participants remain subject to the biases and self-interest they exhibit in private settings. Indeed, correcting contemporaneous market pricing errors is probably not government’s relative advantage. Government and private planners should establish rules ex ante to improve choices and efficiency, including disclosure, reporting, advertising, and default-option-setting regulations. Especiall

Topics: Investor psychology, Capital markets, Policy, Accounting regulation, Disclosure, Behavioral finance, Behavioral economics, Market efficiency This survey was written for presentation at the Carnegie–Rochester Conference Seri
Year: 2002
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