Collective Risk-Taking Decisions with Heterogeneous Beliefs
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.
|Date of creation:||2003|
|Date of revision:|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
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.:
- Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249.
- 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.
- Andrew B. Abel, 2001. "An Exploration of the Effects of Pessimism and Doubt on Asset Returns," NBER Working Papers 8132, National Bureau of Economic Research, Inc.
- Andrew B. Abel, 2001. "An exploration of the effects of pessimism and doubt on asset returns," Working Papers 01-1, Federal Reserve Bank of Philadelphia.
- 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.
- Hayne E. Leland., 1979.
"Who Should Buy Portfolio Insurance?,"
Research Program in Finance Working Papers
95, University of California at Berkeley.
- Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1998.
"Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good To Be True?,"
NBER Working Papers
6354, National Bureau of Economic Research, Inc.
- 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.
- 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.
- Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007. "Representative consumer's risk aversion and efficient risk-sharing rules," Journal of Economic Theory, Elsevier, vol. 137(1), pages 652-672, November.
- Hara, Chiaki & Huang, James & Kuzmics, Christoph, 2007. "Representative Consumer's Risk Aversion and Efficient Risk-Sharing Rules," Discussion Paper 323, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
- 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.
- Miles S. Kimball, 1989.
"Precautionary Saving in the Small and in the Large,"
NBER Working Papers
2848, National Bureau of Economic Research, Inc.
- Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
- 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.
- Gollier Christian, 1995. "The Comparative Statics of Changes in Risk Revisited," Journal of Economic Theory, Elsevier, vol. 66(2), pages 522-535, August.
- Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_909. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If references are entirely missing, you can add them using this form.