On the Survival of Conservatism Traders in an Asset Market with Strategic Interaction

Abstract

This paper examines a static model of an asset market with rational traders, conservatism traders and noise traders. Both rational and conservatism traders receive an informational signal about the asset payoff before any trade takes place. Conservatism traders are slow to update their conditional mean of the asset payoff relative to rational traders. To maximize their own expected profits, all rational and conservatism traders strategically submit their market orders to the market maker. This paper proves analytically that conservatism traders cannot survive. The implication of the results suggests that the anomaly of asset price underreaction to new information is a short-lived phenomenon.