Psychology and Economics
The Limits of Arbitrage
Prof. Andrei Shleifer
February 26, 2009
Consider a crucial feature of arbitrage: fact that it’s often
done by pros who manager other people’s money – e.g.,
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