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Optimal beliefs in the long run: An overlapping generations perspective

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  • Yuan, Yue

Abstract

People have the natural tendency to be optimistic and believe that good outcomes in the future are more likely, but also want to avoid overestimation that could result in bad decision-making. Brunnermeier, Brunnermeier and Parker (2005) and Brunnermeier et al. (2007) established an optimal beliefs framework that balances these two incentives. This paper follows and extends the optimal beliefs framework to consider optimal beliefs in the long run in an overlapping generations sense. Assuming no short-selling, results show that, in almost all cases, there does not exist a stable and interior long-term optimal belief.

Suggested Citation

  • Yuan, Yue, 2012. "Optimal beliefs in the long run: An overlapping generations perspective," Economics Letters, Elsevier, vol. 117(2), pages 525-527.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:2:p:525-527
    DOI: 10.1016/j.econlet.2012.06.052
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    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September.
    2. Markus K. Brunnermeier & Jonathan A. Parker & Christian Gollier, 2007. "Optimal Beliefs, Asset Prices, and the Preference for Skewed Returns," American Economic Review, American Economic Association, vol. 97(2), pages 159-165, May.
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    More about this item

    Keywords

    Optimal expectations; Overlapping generations; Behavioral decision theory;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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