Monday, April 11, 2011

PG 236-240

Fischer’s new views and old views are quite opposite: the Fischer of old said “All traders, even those that lose money, help investors and society generally by helping to make securities correctly priced”; But the new Fischer said, “noise trading actually puts noise into prices.” The question is raised, why do noise traders trade at all? Fischer explains that noise traders think the noise is information, or they just enjoy trading.

Shefrin and Statman wrote a paper analyzing psychology and its applications to finance. Fischer reviewed their paper and loved it, calling it “brilliant”. This paper helped explain and answer questions, showing that investors make decisions for behavioral reasons rather than economical ones.

Information is costly in today’s finance world, especially good information. According to Fischer, equilibrium with costly information is still in equilibrium and is efficient, although others would say otherwise.

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1 comment:

  1. Dr. TufteMay 9, 2011 at 8:47 AM

    A for Rooster.

    I think Rooster has overplayed his hand here: I don't think you'd find many people in academics who'd view a market as inefficient because information is costly.

    Noise trading is a different story though. It seems possible that noise traders are creating most of the noise.

    FWIW: Sheffrin was one of Kim Craft's professors in graduate school.

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