OVERCONFIDENCE 1193 where wa is a standard Wiener process,and it is independent of in- novations to V.Trading Fluctuations in the difference of beliefs across agents will induce trading. It is natural to expect that investors that are more optimistic about the prospects of future dividends will bid up the price of the asset and eventually hold the total (finite)supply.We shall allow for costs of trading:a seller pays c20 per unit of the asset sold.This cost may represent an actual cost of transaction or a tax. At each agents in group Ce(A,B are willing to pay for a unit of the asset.The presence of the short-sale constraint,a finite supply of the asset,and an infinite number of prospective buyers guarantee that any successful bidder will pay his reservation price.The amount that an agent is willing to pay reflects the agent's fundamental valuation and the fact that he may be able to sell his holdings for a profit at a later date at the demand price of agents in the other group.If we let oE(A,B)denote the group of the current owner,o be the other group, and E be the expectation of members of group o,conditional on the information they have at t,then 书”=sup edD,+er(+，-) (10) 20 where r is a stopping time,and is the reservation value of the buyer at the time of transaction t+7. Since dD fdt+opdw,using the equations for the evolution of the conditional mean of beliefs (eqq.[5]and [9]above),we have that w= ee-Dlds+M where EM+,=0.Hence,we may rewrite equation (10)as p,"=max】 e-了+e9-d+e"(折，-0 (11) 20 We shall start by postulating a particular form for the equilibrium This observation simplifies our calculations but is not crucial for what follows.We could partially relax the short-sale constraints or the division of gains from trade,provided that it is still true that the asset owner expects to make speculative profits from other investors. Reproduced with permission of the copyright owner.Further reproduction prohibited without permission.Reproduced with permission of the copyright owner. Further reproduction prohibited without permission