Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model

We analyze the link between pessimism and risk-aversion. We consider a model of partially revealing, competitive rational expectations equilibrium with diverse information, in which the distribution of risk-aversion across individuals is unknown. We show that when a high individual level of risk-aversion is taken as a signal for a high average level of risk-aversion, more risk-averse agents are more optimistic. This correlation between individual risk-aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk. Risk-sharing schemes and welfare implications are analyzed. We show that agents' welfare may increase upon the receipt of more precise information.Optimism, risk-aversion, rational expectations, risk-premium, heterogenous beliefs

Risk exchange with distorted probabilities

An exchange economy is considered,where agents (insurers/banks) trade risks. Decision making takes place under distorted probabilities, which are used to represent either rank-dependence of preferences or ambiguity with respect to real-world probabilities.Pricing formulas and risk allocations,generalising the results of Bühlmann (1980,1984) are obtained via the construction of aggregate preferences from heterogeneous agents’ utility and distortion functions. This involves the introduction of a novel ‘collective ambiguity aversion’ coefficient. It is shown that probability distortion changes insurers’behaviour, who trade not only to share the aggregate market risk, but are also found to bet against each other.Moreover,probability distortion tends to increase the price of insurance (increase asset returns). While the cases of rank-dependence and ambiguity are formally similar,an important distinction emerges as for rank-dependent preferences equilibria are determinate, while for ambiguity they are generally indeterminate

Online consumption communities: An introduction

Online consumption communities play a significant role in the life of many consumers. These communities remove temporal and spacial boundaries, allowing consumers to convene online to connect over a shared consumption interest anytime and from anywhere. The objective of this special issue is to advance our understanding of online consumption communities and stimulate future research in this exciting research domain. Eight papers are included that present cutting-edge research exploring three issues: (1) governance and conflict management in online consumption communities, (2) implications of community membership for individual and societal well-being, and (3) drivers of community success under different ownership structures. In this introductory editorial, each of the papers and its contribution is briefly overviewed

A little give and take

In this article, I contend that the behavioural effects that tend to be labelled as errors by most behavioural economists, and as such have served as the justification for a paternalistic direction in behavioural public policy (i.e. policy intervention that aims to protect people from imposing harms on themselves), are in an ecological sense not errors at all. While acknowledging that modern societies are very different from the types of societies in which these effects evolved, I argue that we still cannot conclude that attempts to modify people’s choices in accordance with these so-called errors will improve the lives of those targeted for behaviour change, particularly given the varied and multifarious private objectives and desires that people pursue. Where people are imposing no substantive harms on others, I maintain that policy makers should restrict themselves to protecting and fostering the fundamental motivational force of reciprocity, which serves to benefit the group (which could be the whole society) and, by extension, most of the people who comprise the group, irrespective of their own personal desires in life. However, when one party to any particular exchange actively uses the behavioural affects to benefit themselves but imposes harms on the other party to the exchange, the concept of a free and fair reciprocal exchange has been violated. In these circumstances, there is an intellectual justification to introduce behavioural-informed regulations – a form of negative reciprocity – against activities that impose unacceptable harms on others. My arguments thus call for behavioural public policy to preserve individual autonomy within an overarching policy framework that nurtures reciprocity whilst at the same time regulates against behavioural-informed practices that impose substantive harms on others, rather than focusing on reducing the harms that people supposedly impose on themselves. This would be a major switch in emphasis for one of the most important developments in public policy in modern times

What Explains The Equity Risk Premium In ASEAN Countries?

This paper aims to mainly investigate the impact of the selected macroeconomic variables such as inflation (INF), gross domestic product (GDP), foreign direct investment (FDI) and stocks traded turn-over ratio (STTR) on equity risk premium (ERP) of six major ASEAN member countries such as Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.  Applied methods are panel pooled regression and panel vector error correction model (VECM) through the latest version of Eviews9. In the former approach, among the selected macroeconomic variables, both INF and STTR significantly and positively affect the ERP. Both periods and years show to have fixed effects as dummy variables. One cointegration has been determined among macroeconomic variables and ERP suggesting a long term equilibrium association which led to employ Panel VECM. INF denotes a significant long-run relationship with ERP and the error correction term results suggest deviation of INF is a relevant factor but not the errors of liquidity as the STTR didn't show any significant impact in the model. Granger Casuality test suggests both INF and ERP do granger causes each other in the short run. Thus, inflation is a robust factor of ERP in two different methods while the STTR is not a robust as it shows different results.

Exuberant Innovations: The Apollo Program

We present an analysis of the economic, political and social factors that underlay the Apollo program, one of the most exceptional and costly projects ever undertaken by the United States in peacetime that culminated in 1969 with the first human steps on the Moon. This study suggests that the Apollo program provides a vivid illustration of a societal bubble, defined as a collective over-enthusiasm as well as unreasonable investments and efforts, derived through excessive public and/or political expectations of positive outcomes associated with a general reduction of risk aversion. We show that economic, political and social factors weaved a network of reinforcing feedbacks that led to widespread over-enthusiasm and extraordinary commitment by those involved in the project as well as by politicians and by the public at large. We propose the general concept of "pro-bubbles”, according to which bubbles are an unavoidable development in technological and social enterprise that benefits society by allowing exceptional niches of innovation to be explore

The trade-off between impartiality and freedom in the 21st Century Cures Act

This is the final version. Available from the University of Pittsburgh via the DOI in this record. Randomized controlled trials test new drugs using various debiasing devices to prevent participants from manipulating the trials. But participants often dislike controls, arguing that they impose a paternalist constraint on their legitimate preferences. The 21st Century Cures Act, passed by US Congress in 2016, encourages the Food and Drug Administration to use alternative testing methods, incorporating participants’ preferences, for regulatory purposes. We discuss, from a historical perspective, the trade-off between trial impartiality and participants’ freedom. We argue that the only way out is considering which methods improve upon the performance of conventional trials in keeping dangerous or inefficacious compounds out of pharmaceutical marketsMinisterio de Ciencia e Innovació