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The Survival of Noise Traders in Financial Markets

J. Bradford De Long, Andrei Shleifer, Lawrence H. Summers and Robert J. Waldmann
The Journal of Business
Vol. 64, No. 1 (Jan., 1991), pp. 1-19
Stable URL: http://www.jstor.org/stable/2353070
Page Count: 19
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
The Survival of Noise Traders in Financial Markets
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Abstract

We present a model of portfolio allocation by noise traders with incorrect expectations about return variances. For such misperceptions, noise traders who do not affect prices can earn higher expected returns than rational investors with similar risk aversion. Moreover, such noise traders can come to dominate the market, in that the probability that they eventually have a high share of total wealth is close to one. Noise traders come to dominate despite their taking of excessive risk and their higher consumption. We conclude that the case against their long-run viability is not as clear-cut as is commonly supposed.

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