Do noise traders influence stock prices?

This paper tests a smart money-noise trader model directly by comparing its predictions with the behavior of actual investors. It assumes that individual probability of being a noise trader is diminishing in income, high-income households are smart money, lower-income households are noise traders with passive investors in between. Market data behave as predicted: high participation by the general population is a negative predictor of one-year returns, and is associated with law participation by very high-income groups. The implications for the equity premium puzzle of the low returns earned by noise traders are discussed.