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Abstract:
We present a model of a financial market where some traders are “cursed” when investing in a risky asset, failing to fully appreciate what prices convey about others’ private information. Markets comprising cursed traders generate more trade than those comprising rationals; mixed markets can generate even more trade because rationals exploit return predictability caused by cursed. Per-trader volume in cursed markets increases with market size; volume may instead disappear when traders infer others’ information from prices but dismiss it as noisier than their own. Public-information revelation raises rational and “dismissive” volume, but lowers cursed volume given moderate non-informational trading motives.