Rational Overconfidence and Social Security
AbstractTwo of the features that distinguish Social Security and many other state mandated pension plans around the world are that (i) a minimum level of savings for retirement is imposed on most citizens and (ii) individuals cannot decide how their contributions are invested. Here, a rationale for these two features, based on ratoinal overconfidence, is proposed. Rational overconfidence is present when equally informed agents hold diverse confident, rational beliefs. The fact that beliefs are diverse means that all of them cannot be correct, hence seen as a collective agents do not act optimally. In the face of rational overconfidence, Pareto efficiency is no long the natural criterion for comparing policies and we suggest ex-post welfare optimality instead. This criterion makes amends for the possible inconsistencies of agents beliefs. Our results on social security are based on a methodology that places itself strictly between the traditional neoclassical approach and that championed by behavioral economics. This methodology does not deviate from the neoclassical assumption of ratoinality but only broadens it and can therefore readily be applied to many public policy issues.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 0916.
Length: 29 pages
Date of creation: 2009
Date of revision:
Subjective Expectations; Rational Beliefs; Ex-post Welfare Optimality; Social Security; Rational Overconfidence; Portfolio Choice;
Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
- D60 - Microeconomics - - Welfare Economics - - - General
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
This paper has been announced in the following NEP Reports:
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.:
- William A. Branch, 2004. "The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations," Economic Journal, Royal Economic Society, vol. 114(497), pages 592-621, 07.
- Kurz, Mordecai & Motolese, Maurizio, 2006. "Risk Premia, diverse belief and beauty contests," MPRA Paper 247, University Library of Munich, Germany.
- Hammond, Peter J, 1981. "Ex-ante and Ex-post Welfare Optimality under Uncertainty," Economica, London School of Economics and Political Science, vol. 48(191), pages 235-50, August.
- Prasanta Pattanaik & Yongsheng Xu, 1998.
"On Preference and Freedom,"
Theory and Decision,
Springer, vol. 44(2), pages 173-198, April.
- Prasanta K. Pattanaik & Yongsheng Xu,, . "On Preference and Freedom," Discussion Papers 96/1, University of Nottingham, School of Economics.
- Pattanaik, P.K. & Xu, Y., 1995. "On preference and Freedom," The A. Gary Anderson Graduate School of Management 95-1a, The A. Gary Anderson Graduate School of Management. University of California Riverside.
- Nielsen, Carsten Krabbe, 2008. "On rationally confident beliefs and rational overconfidence," Mathematical Social Sciences, Elsevier, vol. 55(3), pages 381-404, May.
- Faruk Gul & Wolfgang Pesendorfer, 2005. "The Case for Mindless Economics," Levine's Working Paper Archive 784828000000000581, David K. Levine.
- Chavas, Jean-Paul, 2000. "On information and market dynamics: The case of the U.S. beef market," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 833-853, June.
- Starr, Ross M, 1973. "Optimal Production and Allocation under Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 87(1), pages 81-95, February.
- Mordecai Kurz & Maurizio Motolese, .
"Endogenous Uncertainty and Market Volatility,"
99005, Stanford University, Department of Economics.
- Souleles, Nicholas S, 2004. "Expectations, Heterogeneous Forecast Errors, and Consumption: Micro Evidence from the Michigan Consumer Sentiment Surveys," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(1), pages 39-72, February.
- Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
- B. Douglas Bernheim & Antonio Rangel, 2005.
"Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers,"
NBER Working Papers
11518, National Bureau of Economic Research, Inc.
- B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," Discussion Papers 04-033, Stanford Institute for Economic Policy Research.
- Varian, Hal R, 1985. " Divergence of Opinion in Complete Markets: A Note," Journal of Finance, American Finance Association, vol. 40(1), pages 309-17, March.
- Carsten Nielsen, 2009. "Non-stationary, stable Markov processes on a continuous state space," Economic Theory, Springer, vol. 40(3), pages 473-496, September.
- Carsten Krabbe Nielsen, 2003.
"Floating exchange rates versus a monetary union under rational beliefs: the role of endogenous uncertainty,"
Springer, vol. 21(2), pages 293-315, 03.
- Carsten Krabbe Nielsen, 1997. "Floating Exchange Rates Versus a Monetary Union Under Rational Beliefs: The Role of Endogenous Uncertainty," Discussion Papers 97-22, University of Copenhagen. Department of Economics.
- Tabellini, Guido, 1990.
"A Positive Theory of Social Security,"
CEPR Discussion Papers
394, C.E.P.R. Discussion Papers.
- Frankel, Jeffrey A & Froot, Kenneth A, 1987.
"Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations,"
American Economic Review,
American Economic Association, vol. 77(1), pages 133-53, March.
- Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Nielsen Carsten K, 2007. "Sunspot Rational Beliefs Structures, Equilibria and Excess Volatility," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 7(1), pages 1-26, May.
- Kent Daniel & David Hirshleifer & Avanidhar Subrahmanyam, 1998. "Investor Psychology and Security Market Under- and Overreactions," Journal of Finance, American Finance Association, vol. 53(6), pages 1839-1885, December.
- Carsten Krabbe Nielsen, 1995.
"Rational Belief Structures and Rational Belief Equilibrium,"
95-14, University of Copenhagen. Department of Economics.
- Carsten Krabbe Nielsen, 1996. "Rational belief structures and rational belief equilibria (*)," Economic Theory, Springer, vol. 8(3), pages 399-422.
- Baak, Saang Joon, 1999. "Tests for bounded rationality with a linear dynamic model distorted by heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1517-1543, September.
- Peter J. Hammond, 2013.
"Extending the Original Position: Revisiting the Pattanaik Critique of Vickrey/Harsanyi Utilitarianism,"
Global COE Hi-Stat Discussion Paper Series
gd12-298, Institute of Economic Research, Hitotsubashi University.
- Hammond, Peter J, 2013. "Extending the Original Position : Revisiting the Pattanaik Critique of Vickrey/Harsanyi Utilitarianism," The Warwick Economics Research Paper Series (TWERPS) 1008, University of Warwick, Department of Economics.
- Carsten Nielsen, 2011. "Price stabilizing, Pareto improving policies," Economic Theory, Springer, vol. 47(2), pages 459-500, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kim, Jisoo).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.