| Abstract: |
We experimentally study the transmission of subjective expectations into
actions. Subjects in our experiment report valuations that are far too
insensitive to their expectations, relative to the prediction from a
frictionless model. We propose that the insensitivity is driven by a noisy
cognitive process that prevents subjects from precisely computing asset
valuations. The empirical link between subjective expectations and actions
becomes stronger as subjective expectations approach rational expectations.
Our results highlight the importance of incorporating weak transmission into
belief-based asset pricing models. Finally, we discuss how cognitive noise can
provide a microfoundation for inelastic demand in the stock market. |