fabio guillermo rojas wrote:
I presume you mean irrationaly optimistic self-assesment? I'd say quite a lot. But then comes theYes, irrat self-assesment is a good word for it. Robin, I know you are a
hard question: what policy implications follow from this conclusion?
fan of taxing people for not using their abilities.
Me?! You must be thinking of someone else.
How would you taxHere are two things that might go wrong as a result if irrational investor self-assessment.
people here to make them more efficiently invest or make them have more
rational self-assesments?
A key free market principle is that investors better know how to spend
money than the gov't. Should we be in the business of judging who is
irrational?
1) Prices may be wrong, distorting allocation choices made by companies, farms, etc.
2) There might be too much churning and trading, resulting in excess transaction costs.
On 1), imagine that a government agency was given a trillion dollars of assets to invest, and charged
with the task of fixing any prices that they thought were off. If this agency can in fact tell when prices are
wrong and act on this info, it should on average make money on its investments, probably enough to
cover its operating expenses in addition to preserving its capital. So it wouldn't really cost the rest of
us anything in this case. Those who believe that government agencies have this level of insight and
ability to resist rent-seeking pressure should advocate this new agency. Those who believe otherwise
should predict that such an agency would squander its endowment, and should argue that it be given
no new capital to work with once it does.
On 2), there are net positive externalities from "excess" transactions, in that it induces information
aggegration that help inform important allocation decisions. Given such an externality, do we really
know that we have too much trading?
