Optimism, pessimism and financial bubbles
AbstractThis paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Pareto-optimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.
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Date of creation: Feb 2012
Date of revision:
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Rational bubbles; RDU preferences.;
Other versions of this item:
- Bertrand Wigniolle, 2012. "Optimism, pessimism and financial bubbles," Documents de travail du Centre d'Economie de la Sorbonne 12005, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D9 - Microeconomics - - Intertemporal Choice
- G1 - Financial Economics - - General Financial Markets
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-08 (All new papers)
- NEP-MIC-2012-03-08 (Microeconomics)
- NEP-UPT-2012-03-08 (Utility Models & Prospect Theory)
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