The Price Impact and Survival of Irrational Traders

Leonid Kogan, Stephen A. Ross, Jiang Wang, and Mark M. Westerfield
Journal of Finance 2006, 61(1): 195-229
Winner of the FAME Research Prize for 2004 (Awarded by the Swiss Finance Institute)
Winner of the Smith-Breeden Prize, First Place for 2006 (Awarded by the American Finance Association)

[PDF] [Journal Version] [SSRN Version]

Summary

Price impact and survival are two independent concepts; neither is sufficient for the other. In a simple GE economy, we demonstrate that irrational traders can survive and/or have price impact.

Abstract

Milton Friedman argued that irrational traders will consistently lose money, won’t survive and, therefore, cannot influence long run asset prices. Since his work, survival and price impact have been assumed to be the same. In this paper, we demonstrate that survival and price impact 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. We also show that irrational traders’ portfolio policies can deviate from their limits long after the price process approaches its long-run limit. In contrast to a partial equilibrium analysis, these general equilibrium considerations matter for the irrational traders’ long-run survival.

Cite as

Kogan, Leonid, Stephen A. Ross, Jiang Wang, and Mark M. Westerfield. 2006. “The Price Impact and Survival of Irrational Traders.” Journal of Finance 61(1): 195–229. https://doi.org/10.1111/j.1540-6261.2006.00834.x

BibTeX

@article{KoganRossWangWesterfield2006,
  author  = {Kogan, Leonid and Ross, Stephen A. and Wang, Jiang and Westerfield, Mark M.},
  title   = {The Price Impact and Survival of Irrational Traders},
  journal = {Journal of Finance},
  year    = {2006},
  volume  = {61},
  number  = {1},
  pages   = {195--229},
  doi     = {10.1111/j.1540-6261.2006.00834.x},
  url     = {https://doi.org/10.1111/j.1540-6261.2006.00834.x}
}

The PDF posted here is the authors’ manuscript (October 2004 draft). The version of record is available from the journal at the DOI above. Updated October 5, 2026.