TY - JOUR AU - Kogan,Leonid AU - Ross,Stephen AU - Wang,Jiang AU - Westerfield,Mark TI - The Price Impact and Survival of Irrational Traders JF - National Bureau of Economic Research Working Paper Series VL - No. 9434 PY - 2003 Y2 - January 2003 UR - http://www.nber.org/papers/w9434 L1 - http://www.nber.org/papers/w9434.pdf N1 - Author contact info: Leonid Kogan MIT Sloan School of Management 100 Main Street, E62-636 Cambridge, MA 02142 Tel: 617/504-9728 Fax: 617/258-6855 E-Mail: lkogan@mit.edu Stephen A. Ross MIT Sloan School of Management 100 Main Street, E62-616 Cambridge, MA 02142 Tel: 617/258-8371 Fax: 203/772-1365 E-Mail: sross@mit.edu Jiang Wang MIT Sloan School of Management 100 Main Street, E62-614 Cambridge, MA 02142 Tel: 617/253-2632 Fax: 617/258-6855 E-Mail: wangj@mit.edu Mark Westerfield Foster School of Business University of Washington Box 353226 Seattle, WA 98195-3226 Tel: 205-543-4567 E-Mail: mwesterf@uw.edu AB - Milton Friedman argued that irrational traders will consistently lose money, won't survive and, therefore, cannot influence long run equilibrium asset prices. Since his work, survival and price influence have been assumed to be the same. Often partial equilibrium analysis has been relied upon to examine the survival of irrational traders and to make inferences on their influence on prices. In this paper, we demonstrate that survival and influence on prices are two independent concepts. The price impact of irrational traders does not rely on their long-run survival and they can have a significant impact on asset prices even when their wealth becomes negligible. In addition, in contrast to a partial equilibrium analysis, general equilibrium considerations matter since the ability of irrational traders to impact prices even when their wealth is diminishing can significantly affect their chances for long-run survival. In sum, in a long-run equilibrium, we explicitly show that price impact can occur whether or not the irrational traders survive. In related work, we show that even if the irrational traders survive they may have no price impact. ER -