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Confidence and the welfare of less-informed investors

This is a research report on Confidence and the welfare of less-informed investors uploaded by Jasmine Pvk in category: All Documents »  International Business »  Global Business Environment section of our research repository.
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Tags: steady state prices
Description:
In response to recommendations by the AICPA Special Committee on Financial Reporting and the Association for
Investment Management and Research, the FASB recently invited comment regarding the question, ``Given [ecient]
markets, would any disservice be done to the interests of individual investors by allowing professional investors access
to more extensive information?'' [AICPA (1996) Report of the Special Committee on Financial Reporting and the
Association for Investment Management and Research, New York, p. 22]. Research in psychology [e.g. Grin &
Tversky (1992) The weighing of evidence and the determinants of con®dence. Cognitive Psychology, 411±435] suggests
that less-informed investors may su€er from over-con®dence and trade too aggressively given their information. This
paper reports on an experiment designed to address these issues. In the experiment, security values are determined by
the price/book ratios of actual ®rms, ``more-informed'' investors observe three value-relevant ®nancial ratios derived
from Value-Line reports, and ``less-informed'' investors observe only one of those signals. Even after market prices
have stabilized after many rounds of trading, less-informed investors systematically transfer wealth to more-informed
investors as a result of biased prices and overly aggressive trading. However, alerting less-informed investors to the
extent of their informational disadvantage eliminates these welfare losses.



 

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