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
DO  - 10.3386/w9434
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
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  -