Unskilled traders, overconfidence and information acquisition

Abstract

The value of an asset has two components, referred to as obvious and obscure. Unskilled traders are only aware of the obvious component and thus overestimate the precision of the information they may acquire. Unskilled traders are overcon dent when informed and the intensity at which they trade makes researching the obscure component pro table to skilled traders, and this even when research costs are such that no information acquisition takes place in a skilled-only market. Hence overcon dence in our model encourages research by all, including the skilled (rational) traders.