Using detailed transactions data from a peer-to-peer lending market, Lin et al. (2018) present the first direct evidence that, when faced with identical information sets, sophisticated institutional investors exploit less sophisticated retail investors. Consistent with classic economic theory, their results suggest that the relative role of less sophisticated “noise traders” will decline over time and, as a result, they will eventually become unimportant. The results also demonstrate, however, that this does not occur quickly—it would take more than four centuries of exploitation by sophisticated investors for noise traders’ fraction of market wealth to fall from 50% to 10%.
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