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Collective Risk-Taking Decisions with Heterogeneous Beliefs

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  • Christian Gollier

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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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 909.

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

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

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References

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  1. Gollier, Christian, 2003. "Optimal Dynamic Portfolio Risk with First-Order and Second-Order Predictability," IDEI Working Papers 250, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Leland, Hayne E, 1980. " Who Should Buy Portfolio Insurance?," Journal of Finance, American Finance Association, vol. 35(2), pages 581-94, May.
  3. Pok-sang Lam & Stephen G. Cecchetti & 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.
  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.
  5. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
  6. Hara, C. & Christoph Kuzmics, 2004. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," Cambridge Working Papers in Economics 0452, Faculty of Economics, University of Cambridge.
  7. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, December.
  8. Gollier Christian, 1995. "The Comparative Statics of Changes in Risk Revisited," Journal of Economic Theory, Elsevier, vol. 66(2), pages 522-535, August.
  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.
  10. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  11. Constantinides, George M, 1982. "Intertemporal Asset Pricing with Heterogeneous Consumers and without Demand Aggregation," The Journal of Business, University of Chicago Press, vol. 55(2), pages 253-67, April.
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Cited by:
  1. Gollier, Christian & Zeckhauser, Richard, 2003. "Collective Investment Decision Making with Heterogeneous Time Preferences," IDEI Working Papers 198, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Christian Gollier, 2007. "Whom should we believe? Aggregation of heterogeneous beliefs," Journal of Risk and Uncertainty, Springer, vol. 35(2), pages 107-127, October.

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