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On rationally confident beliefs and rational overconfidence

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  • Nielsen, Carsten Krabbe

Abstract

The starting point for rational beliefs models is the existence of an empirical distribution for the stochastic process of observed exogenous and endogenous variables. Since the true, unknown stochastic process that generates this observed empirical distribution is only weakly asymptotic mean stationary (WAMS), i.e. not necessarily stationary, there are many possible processes that could have lead to this empirical distribution. The distribution of any process that is, in this sense, compatible with observations is called a rational belief. We provide a characterization of WAMS processes that among other things leads us to link rational beliefs and overconfidence: Rational beliefs exhibit rational confidence and, since different agents may hold different rational beliefs, the resulting diversity gives rise to rational overconfidence at the social level. In sum, the stylized facts of diversity of beliefs and overconfidence are replicated by rational belief models.

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Bibliographic Info

Article provided by Elsevier in its journal Mathematical Social Sciences.

Volume (Year): 55 (2008)
Issue (Month): 3 (May)
Pages: 381-404

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Handle: RePEc:eee:matsoc:v:55:y:2008:i:3:p:381-404

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Web page: http://www.elsevier.com/locate/inca/505565

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Cited by:
  1. Carsten Nielsen, 2009. "Non-stationary, stable Markov processes on a continuous state space," Economic Theory, Springer, vol. 40(3), pages 473-496, September.
  2. Carsten Krabbe Nielsen, 2009. "Rational Overconfidence and Social Security," Discussion Paper Series 0916, Institute of Economic Research, Korea University.
  3. Carsten Nielsen, 2011. "Price stabilizing, Pareto improving policies," Economic Theory, Springer, vol. 47(2), pages 459-500, June.

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