Psychology and Economics The Limits of Arbitrage

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					Psychology and Economics

  The Limits of Arbitrage


     Prof. Andrei Shleifer
      February 26, 2009
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                   Delegated Arbitrage

Consider a crucial feature of arbitrage: fact that it’s often
done by pros who manager other people’s money – e.g.,
hedge funds.

On one hand, pros have many advantages.
  - Spend full time on it; acquire more info, unlikely to
sleep through big news.
  - Practice may help get rid of innate behavioral biases.

But pros also face classic agency problem. Not enough to
be good; have to convince investors and/or bosses that
you are.
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