  Portfolio managers' orders trade off return and trading cost predictions.
Return predictions rely on alpha models, whereas price impact models quantify
trading costs. This paper studies what happens when trades are based on an
incorrect price impact model, so that the portfolio either over- or
under-trades its alpha signal. We derive tractable formulas for these
misspecification costs and illustrate them on proprietary trading data. The
misspecification costs are naturally asymmetric: underestimating impact
concavity or impact decay shrinks profits, but overestimating concavity or
impact decay can even turn profits into losses.
