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Collective Risk-Taking Decisions with Heterogeneous Beliefs

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Author Info
Christian Gollier ()

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Abstract

Suppose that a group of agents having divergent expectations can share risks efficiently. We examine how this group should behave collectively to manage these risks. We show that the beliefs of the representative agent is in general a function of the group.s wealth level, or equivalently, that the representative agent has a state-dependent utility function. We define the individual degree of pessimism as an index measuring probability differences across states. We show that the degree of pessimism of the representative agent is the mean of the individual ones weighted by their index of absolute risk tolerance. From this central result, we show how increasing disagreement on the state probability affects the state probability of the representative agent. We show that the divergence of opinions about the probability of occurence of a boom may help solving the equity premium puzzle.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 909.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_909

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Related research
Keywords: aggregation of beliefs; state-dependent utility; efficient risk sharing; pessimism; disagreement; asset pricing; portfolio choices;

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Find related papers by JEL classification:
D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
  2. Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September. [Downloadable!] (restricted)
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  3. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," Journal of Business, University of Chicago Press, vol. 55(2), pages 253-67, April. [Downloadable!] (restricted)
  4. Laurent Calvet ; Jean-Michel Grandmont ; Isabelle Lemaire, 2001. "Aggregation of Heterogenous Beliefs and Asset Pricing in Complete Financial Markets," Working Papers 2001-01, Centre de Recherche en Economie et Statistique. [Downloadable!]
  5. Gollier, Christian, 2003. "Optimal Dynamic Portfolio Risk with First-Order and Second-Order Predictability," IDEI Working Papers 250, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  6. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January. [Downloadable!] (restricted)
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  7. Chiaki Hara & James Huang & Christoph Kuzmics, 2006. "Representative Consumer’s Risk Aversion and Efficient Risk-Sharing Rules," KIER Working Papers 620, Kyoto University, Institute of Economic Research. [Downloadable!]
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  8. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March. [Downloadable!] (restricted)
  9. Abel, Andrew B., 2002. "An exploration of the effects of pessimism and doubt on asset returns," Journal of Economic Dynamics and Control, Elsevier, vol. 26(7-8), pages 1075-1092, July. [Downloadable!] (restricted)
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  10. Leland, Hayne E, 1980. " Who Should Buy Portfolio Insurance?," Journal of Finance, American Finance Association, vol. 35(2), pages 581-94, May. [Downloadable!] (restricted)
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  11. Gollier Christian, 1995. "The Comparative Statics of Changes in Risk Revisited," Journal of Economic Theory, Elsevier, vol. 66(2), pages 522-535, August. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Gollier, 2007. "Whom should we believe? Aggregation of heterogeneous beliefs," Journal of Risk and Uncertainty, Springer, vol. 35(2), pages 107-127, October. [Downloadable!] (restricted)
  2. Gollier, Christian & Zeckhauser, Richard, 2003. "Collective Investment Decision Making with Heterogeneous Time Preferences," IDEI Working Papers 198, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
    Other versions:
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