Do asset prices aggregate investors’ private information about the ability of ﬁnancial analysts? We show that as ﬁnancial analysts become reputable, the market can get trapped: Investors optimally choose to ignore their private information, and blindly follow analyst recommendations. As time goes by and recommendations accumulate, arbitrage based on the inferred ability of analysts may become proﬁtable again. The market can thus be trapped at times and yet be able, in the long run, to sort the pundits from the quacks. However, this process is impaired when asset fundamentals are volatile: in this case, the market might be trapped indeﬁnitely.
Rudiger, Jesper and Vigier, Adrien, "Pundits and Quacks" (2015). Cowles Foundation Discussion Papers. 2430.