Physicist, Startup Founder, Blogger, Dad

Monday, November 15, 2004

MSFT and Bounded Rationality

Bounded rationality (I prefer bounded cognition) refers to the cognitive or information processing limits of participants in otherwise efficient markets. Specifically, traders or consumers who lack the time or ability to figure things out before transacting. (I will refrain from calling them monkeys or noise traders :-) I discussed this in an earlier post, noting that a lot of investors were confused about the consequences of the MSFT special dividend of $3.

It seemed a lot people were under the impression that they should buy the stock in order to get the dividend, not knowing that the price would drop after it was issued. (To be eligible for the dividend you had to own your shares by end of trading last Friday, so we are now ex-dividend.) You can judge for yourself from these graphs whether it looks like there was a runup in the stock due to the anticipated dividend. As of opening today the share price dropped $3 to just over $27, so the discontinuity was there as predicted - $27 looks suspiciously like the value before the runup!

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