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Collective Risk-Taking Decisions with Heterogeneous Beliefs

  • Christian Gollier

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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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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  1. 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.
  2. 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.
  3. Rothschild, Michael & Stiglitz, Joseph E., 1971. "Increasing risk II: Its economic consequences," Journal of Economic Theory, Elsevier, vol. 3(1), pages 66-84, March.
  4. 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.
  5. Christian Gollier, 2004. "The Economics of Risk and Time," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262572249, June.
  6. Gollier Christian, 1995. "The Comparative Statics of Changes in Risk Revisited," Journal of Economic Theory, Elsevier, vol. 66(2), pages 522-535, August.
  7. Kimball, Miles S, 1990. "Precautionary Saving in the Small and in the Large," Econometrica, Econometric Society, vol. 58(1), pages 53-73, January.
  8. 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.
  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. Leland, Hayne E, 1980. " Who Should Buy Portfolio Insurance?," Journal of Finance, American Finance Association, vol. 35(2), pages 581-94, May.
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