As part of the series of the „Finance Research Seminar“, VGSF welcomes Sam Hartzmark from Boston College Carroll School of Management to present his research paper.
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Paper
Price Agnostic Demand
(joint with Abigail Sussman)
We document that investors lack conviction as to what the stock market price should be, absent seeing it. This is at odds with most asset pricing models, which assume that investors are uncertain about the future, but understand what the current market price should be and whether the actual price is different from this. Through experiments, we find that online participants, MBA students, and asset-management professionals who are provided with information about fundamentals are unable to identify extreme deviations from market prices. When directly asked, both asset-management professionals and LLM reasoning models do not think it is possible to use information to reliably estimate the level of the market within 10\% without seeing the prevailing price. We document that professional return forecasts, published trading strategies, and investment advice are largely agnostic about the market price level. This suggests that return expectations are often formed, and many investment decisions are made, without conviction as to the prevailing market price level. We call this channel price agnostic demand. This represents a significant limit to arbitrage which can help explain a number of puzzling empirical patterns in asset prices such as why prices exhibit excess volatility and why markets appear inelastic.
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