Internal rationality, imperfect market knowledge and asset prices

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DOI:	https://doi.org/10.1016/j.jet.2010.11.003
URL:	https://ub-madoc.bib.uni-mannheim.de/31901
Weitere URL:	https://www.sciencedirect.com/science/article/pii/...
URN:	urn:nbn:de:bsz:180-madoc-319017
Dokumenttyp:	Zeitschriftenartikel
Erscheinungsjahr:	2011
Titel einer Zeitschrift oder einer Reihe:	Journal of Economic Theory : JET
Band/Volume:	146
Heft/Issue:	3
Seitenbereich:	1244-1252
Ort der Veröffentlichung:	Amsterdam
Verlag:	Elsevier
ISSN:	0022-0531
Sprache der Veröffentlichung:	Englisch
Einrichtung:	Fakultät für Rechtswissenschaft und Volkswirtschaftslehre > Geldpolitik und Makroökonomik (Adam 2008-)
Fachgebiet:	330 Wirtschaft
Fachklassifikation:	JEL: G12 , G14 , D83 , D84,
Freie Schlagwörter (Englisch):	Learning, Internal rationality, Consumption based asset pricing
Abstract:	We present a decision theoretic framework in which agents are learning about market behavior and that provides microfoundations for models of adaptive learning. Agents are ‘internally rational’, i.e., maximize discounted expected utility under uncertainty given dynamically consistent subjective beliefs about the future, but agents may not be ‘externally rational’, i.e., may not know the true stochastic process for payoff relevant variables beyond their control. This includes future market outcomes and fundamentals. We apply this approach to a simple asset pricing model and show that the equilibrium stock price is then determined by investors’ expectations of the price and dividend in the next period, rather than by expectations of the discounted sum of dividends. As a result, learning about price behavior affects market outcomes, while learning about the discounted sum of dividends is irrelevant for equilibrium prices. Stock prices equal the discounted sum of dividends only after making very strong assumptions about agents’ market knowledge.