speculative investor behavior and learning as traders learn about the true distribution of some asset s dividends a speculative premium occurs as each trader anticipates the possibility of reselling the asset to another trader before complete learning has occurred small differences in prior beliefs lead to large speculative premiums during the learning process this phenomenon helps explain a paradox concerning the pricing of initial public offerings the result casts light on the significance of the common prior assumption in economic models

utilitarian aggregation of beliefs and tastes harsanyi s utilitarianism is extended here to savage s framework we formulate a pareto condition that implies that both society s utility function and its probability measure are linear combinations of those of the individuals an indiscriminate pareto condition has been shown to contradict linear aggregation of beliefs and tastes we argue that such a condition is not compelling society should not necessarily endorse a unanimous choice when it is based on contradictory beliefs our pareto condition is restricted to choices that involve identical beliefs only

employer stock and 401 k plans the sharp decline in the stock prices of several firms at which employees held a large fraction of their 401 k plan assets in company stock including enron global crossing lucent and polaroid has sparked a public policy debate about investment options in 401 k plans at many large firms particularly those with retirement saving plans that combine elements of an employee stock ownership plan esop with a traditional 401 k a substantial fraction of defined contribution retirement plan assets are held in company stock such undiversified holdings are a source of concern because they raise the volatility of the retirement wealth for employees and expose some workers to the prospect of very small retirement values holding an undiversified position in employer stock may be particularly costly because of the potential correlation between company stock returns and the value of the worker s human capital which may depend on the company s prospects this paper reviews the extent of undiversified company stock investments in 401 k plans evaluates the cost of such investments from an employee s perspective and discusses a range of policy actions that could address the excessive concentration of retirement plan assets

consensus consumer and intertemporal asset pricing with heterogeneous beliefs le fichier attache est egalement edite dans les cahier de la chaire les particuliers face aux risques de l institut de finance de dauphine cahier n 7 mars 2007

no betting pareto dominance we argue that the notion of pareto dominance is not as compelling in the presence of uncertainty as it is under certainty in particular voluntary trade based on differences in tastes is commonly accepted as desirable because tastes cannot be wrong by contrast voluntary trade based on incompatible beliefs may indicate that at least one agent entertains mistaken beliefs we propose and characterize a weaker no betting notion of pareto domination which requires on top of unanimity of preference the existence of shared beliefs that can rationalize such preference for each agent

ex ante and ex post welfare optimality under uncertainty it is widely believed by economic theorists that if there were no transactions costs and if all information about the economy were perfectly shared by all then arrow debreu contingent commodity markets should bring about an ideal allocation the basis for this belief seems clear we have the two efficiency theorems of welfare economics which assure us that in the absence of external effects any competitive allocation is pareto efficient and that any pareto efficient allocation is competitive provided that appropriate lump sum transfers are made of course there are some reservations that need to be made local satiation and non convexities are well known to cause problems but these are not the problems i wish to discuss here to return to the usual argument the next step involves noticing how with contingent commodity markets the efficiency theorems of welfare economics carry over to an economy with uncertainty as explained for instance in chapter 7 of debreu s theorpj of value the fundamental value judgment that gives these efficiency theorems their normative interest is what may be called consumer sovereignty it is an assumption that the social welfare ordering should respect the preferences that govern consumers market behaviour it is a serious value judgment more serious than most economists have been prepared to concede but its seriousness increases when there is uncertainty we know full well that individuals misperceive the probabilities of certain events assuming that they even perceive any probabilities at all see for example kahneman and tversky 1979 nor are we always willing to accept as appropriate the attitudes to risk of individuals who seem either extremely reckless or extremely cautious societies are often willing to make some gestures towards property owners who have not insured themselves adequately against damage from fire flood or tempest and not just because of imperfect insurance markets or even misperceptions of probabilities in addition the inequalities of income that arise when some individuals take more risks than others are not necessarily seen to be desirable particularly if an individual has undertaken a useful but risky activity and has a very low income as a result of failure such gestures are examples of contingent lump sum transfers it seems clear that if such transfers occur to a sufficient extent they could supplant completely the securities markets which are usually sufficient to bring about pareto efficiency they may even be able to go further and correct the imperfections of an arrow debreu market allocation when individuals do misperceive probabilities or else have wrong attitudes to risk this is the main question i wish to consider here the idea that consumer sovereignty should not always extend to economies with uncertainty is not new it can be found in work by diamond 1967 dr6ze

bubbles crashes and endogenous expectations in experimental spot asset markets1 spot asset trading is studied in an environment in which all investors receive the same dividend from a known probability distribution at the end of each of t 15 or 30 trading periods fourteen of twenty two experiments exhibit price bubbles followed by crashes relative to intrinsic dividend value when traders are experienced this reduces but does not eliminate the probability of a bubble the regression of changes in mean price on lagged excess bids number of bids minus the number of offers in the previous period p pt a f b 1 o l supports the hypothesis that a e d the one period expected value of the dividend and that f 0 where excess bids is a surrogate measure of excess demand arising from homegrown capital gains losses expectations thus when bt 1 o goes to zero we have convergence to rational expectations in the sense of fama 1970 that arbitrage becomes unprofitable the observed bubble phenomenon can also be interpreted as a form of temporary myopia tirole 1982 from which agents learn that capital gains expectations are only temporarily sustainable ultimately inducing common expectations or priors tirole 1982 four of twenty six experiments all using experienced subjects yield outcomes that appear to the chart s eye to converge early to rational expectations although even in these cases we get 0 and small price fluctuations of a few cents that invite scalping

effects of financial innovations on market volatility when beliefs are heterogeneous abstract consider a model with two logarithmic utility maximizer agents that observe aggregate consumption but disagree about its expected rate of change markets are incomplete we first show that volatility of the interest rate in an economy with additional information is higher in a complete markets economy with no additional information there are two differences in volatility with the previous the first one due to the increase in volatility of the wealth share of the individuals is always positive the second difference is the change in covariance between the components of the interest rate volatility and can be positive or negative

belief disagreements and collateral constraints belief disagreements have been suggested as a major contributing factor to the recent subprime mortgage crisis this paper theoretically evaluates this hypothesis i assume that optimists have limited wealth and take on leverage so as to take positions in line with their beliefs to have a significant effect on asset prices they need to borrow from traders with pessimistic beliefs using loans collateralized by the asset itself since pessimists do not value the collateral as much as optimists do they are reluctant to lend which provides an endogenous constraint on optimists ability to borrow and to influence asset prices i demonstrate that the tightness of this constraint depends on the nature of belief disagreements optimism concerning the probability of downside states has no or little effect on asset prices because these types of optimism are disciplined by this constraint instead optimism concerning the relative probability of upside states could have significant effects on asset prices this asymmetric disciplining effect is robust to allowing for short selling because pessimists that borrow the asset face a similar endogenous constraint these results emphasize that what investors disagree about matters for asset prices to a greater extent than the level of disagreements when richer contracts are available relatively complex contracts that resemble some of the recent financial innovations in the mortgage market endogenously emerge to facilitate betting

leverage cycles and the anxious economy ing opportunities for emerging economies their access to international markets has turned out to be very volatile with frequent periods of market closures even worse as we will show emerging economies with sound fundamentals are the ones that issue less debt during these closures the goal of this paper is to present a theory of asset pricing that will shed light on the problems of emerging assets like emerging markets that are not yet mature enough to be attractive to the general public their marginal buyers are liquidity constrained investors with small wealth relative to the whole economy who are also marginal buyers of other risky assets we will use our theory to argue that the periodic problems faced by emerging asset classes are sometimes symptoms of what we call a global anxious economy rather than of their own fundamental weaknesses

a welfare criterion for models with distorted beliefs this paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs instead of taking a stand on whose belief is correct our criterion asserts an allocation to be belief neutral ine cient if it is ine cient under any convex combination of agents beliefs while this criterion gives an incomplete ranking of social allocations it can identify negative sum speculation in a broad range of prominent models with distorted beliefs

neglected risks financial innovation and financial fragility abstract we present a standard model of financial innovation in which intermediaries engineer securities with cash flows that investors seek but modify two assumptions first investors and possibly intermediaries neglect certain unlikely risks second investors demand securities with safe cash flows financial intermediaries cater to these preferences and beliefs by engineering securities perceived to be safe but exposed to neglected risks because the risks are neglected security issuance is excessive as investors eventually recognize these risks they fly back to the safety of traditional securities and markets become fragile even without leverage precisely because the volume of new claims is excessive

the chinese warrants bubble in 2005 2008 over a dozen put warrants traded in china went so deep out of the money that they were almost certain to expire worthless nonetheless each warrant was traded more than three times each day at substantially inflated prices this bubble is unique in that the underlying stock prices make warrant fundamentals publicly observable and that warrants have predetermined finite maturities this sample allows us to examine a set of bubble theories in particular our analysis highlights the joint effects of short sales constraints and heterogeneous beliefs in driving bubbles and confirms several key findings of the experimental bubble literature jel g12 g13 o16 p34

unemployed but optimistic optimal insurance design with biased beliefs biased perceptions of risks change the perceived value of insurance and the per ceived returns to avoiding these risks i show empirically that unemployed workers overestimate how quickly they will nd work but underestimate the return to their search eorts i analyze the consequences for the optimal design of unemployment insurance with biased beliefs contracts equalizing the marginal smoothing ben e t and the moral hazard cost of insurance are suboptimal social and private insurance diverge a paternalistic social planner corrects the moral hazard cost for the distortion in the insured s eort choice while private insurers focus on the perceived rather than the true smoothing bene ts when unemployed workers are optimistic privatizing unemployment insurance may result in ine ciently low or rapidly decreasing unemployment bene ts

heterogeneous expectations and bond markets this paper presents a dynamic equilibrium model of bond markets in which two groups of agents hold heterogeneous expectations about future economic conditions the heterogeneous expectations cause agents to take on speculative positions against each other and therefore generate endogenous relative wealth fluctuation the relative wealth fluctuation amplifies asset price volatility and contributes to the time variation in bond premia our model shows that a modest amount of heterogeneous expectations can help explain several puzzling phenomena including the excessive volatility of bond yields the failure of the expectations hypothesis and the ability of a tent shaped linear combination of forward rates to predict bond returns the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

trade with heterogeneous prior beliefs and asymmetric information no trade theorems have shown that new information will not lead to trade when agents share the same prior beliefs this paper explores the structure of no trade theorems with heterogeneous prior beliefs it is shown how different notions of efficiency under asymmetric information ex ante interim ex post are related to agents prior beliefs as well as incentive compatible and public versions of those efficiency concepts these efficiency results are used to characterize necessary and sufficient conditions on agents beliefs for no trade theorems in different trading environments

toward choice theoretic foundations for behavioral welfare economics interest in behavioral economics has grown in recent years stimulated largely by accumulating evidence that the standard model of consumer decision making provides an inadequate positive description of human behavior behavioral models are increasingly finding their way into policy evaluation which inevitably involves welfare analysis no consensus concerning the appropriate standards and criteria for behavioral welfare analysis has emerged yet this paper summarizes our effort to develop a unified framework for behavioral welfare economics for a detailed discussion see bernheim and rangel 2007 one that can be viewed as a natural extension of standard welfare economics standard welfare analysis is based on choice not on utility or preferences in its simplest form it instructs the planner to respect the choices an individual would make for himself the guiding normative principle is an extension of the libertarian deference to freedom of choice which takes the view that it is better to give a person the thing he would choose for himself rather than something that someone else would choose for him we show that it is possible to extend the standard choice theoretic approach to welfare analysis to situations where individuals make inconsistent choices which are prevalent in behavioral economics

securitization bubbles structured finance with disagreement about default risk abstract an additional reason for the structured finance boom of the 2000s may have been disagreement about default risk of collateral assets when risk neutral investors disagree about average default probabilities structuring collateral cash flow raises prices by concentrating optimists demand on risky tranches with disagreement about default correlation low correlation investors believe in diversification and pay high prices for senior tranches they deem riskless high correlation investors value junior tranches they expect to pay whenever aggregate conditions are good risk aversion and short selling through credit default swaps reduce the prices of both pass through and structured securitizations but may increase the return to tranching

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

speculation and risk sharing with new financial assets while the traditional view of nancial innovation emphasizes the risk sharing role of new nancial assets belief disagreements about these assets naturally lead to speculation which represents a powerful economic force in the opposite direction this paper investigates the eect of nancial innovation on portfolio risks in an economy when both the risk sharing and the speculation forces are present financial assets provide hedging services but they are also subject to speculation because traders do not necessarily agree about their payos i de ne the average variance of traders net worths as a measure of portfolio risks for this economy and i decompose it into two components the uninsurable variance de ned as the average variance that would obtain if there were no belief disagreements and the speculative variance de ned as the residual variance that results from speculative trades based on belief disagreements financial innovation always decreases the uninsurable variance because new assets increase the possibilities for risk sharing my main result shows that nancial innovation also always increases the speculative variance this is true even if traders completely agree about the payos of new assets the intuition behind this result is the hedge more bet more eect traders use new assets to hedge their bets on existing assets which in turn enables them to place larger bets and take on greater risks my second set of results concern endogenous nancial innovation when belief disagreements are su ciently large a pro t seeking market maker introduces assets that maximize the average variance among all possible choices completely disregarding the risk sharing motive for nancial innovation my third set of results concern a calibration of the model in the context of the gdp indexed assets proposed by athanasoulis and shiller 2001 when traders have reasonable amounts of belief disagreements these assets would have the unintended consequence of increasing their consumption risks

financial innovation and asset price volatility we compare asset prices in an overlapping generations model for incomplete and complete markets individuals within a generational cohort have heterogeneous beliefs about future states of the economy and thus would like to make bets against each other in the incomplete markets economy agents cannot make such bets asset price volatility is very small the situation changes dramatically when markets are completed through financial innovations as the set of available securities now allows agents with different beliefs to place bets against each other wealth shifts across agents and generations such changes in the wealth distribution lead to substantial asset price volatility

intertemporal asset pricing with heterogeneous beliefs abstract we examine the behaviour of the interest rate asset prices and asset holdings in an economy with heterogeneous rationally updated beliefs about the expected rate of production growth the equilibrium interest rate is a weighted average of the interest rates that would prevail in economies populated by homogeneous agents with the beliefs of the respective agents in the heterogeneous model the weights are given by the fractions of total wealth held financial innovation affects the dynamics of allocations and prices but preserves the aggregate output process and the structure of equilibrium asset prices also display the wealth weighted average characterization journal of economic literature classification numbers c60 d52 d91 g12

beyond revealed preference choice theoretic foundations for behavioral welfare economics we propose a broad generalization of standard choice theoretic welfare economics that encompasses a wide variety of nonstandard behavioral models our approach exploits the coherent aspects of choice that those positive models typically attempt to capture it replaces the standard revealed preference relation with an unambiguous choice relation roughly x is strictly unambiguously chosen over y written xp y iff y is never chosen when x is available under weak assumptions p is acyclic and therefore suitable for welfare analysis it is also the most discerning welfare criterion that never overrules choice the resulting framework generates natural counterparts for the standard tools of applied welfare economics and is easily applied in the context of specific behavioral theories with novel implications though not universally discerning it lends itself to principled refinements

debt financing in asset markets short term debt such as overnight repurchase agreements and commercial paper was heavily used by financial institutions to fund their investment positions during the asset market boom preceding the financial crisis of 2007 2008 and later played a major role in leading to the distress of these institutions during the crisis what explains the popularity of short term debt in financing asset market investments geanakoplos 2010 presents a dynamic model of the joint equilibrium of asset markets and credit markets in which optimistic buyers of a risky asset use the asset as collateral to raise debt financing from less optimistic creditors the asset s collateral value depends on the marginal creditor s asset valuation and determines the buyers purchasing capacity to bid up the asset price geanakoplos posits that short term debt allows the asset buyers to maximize riskless leverage 1 short term debt however exposes the asset buyers to rollover risk e g acharya gale and yorulmaker 2011 and he and xiong 2012 forthcoming which is reflected in the fact that the asset buyers in geanakoplos model may not be able to obtain refinancing after a negative fundamental shock as a result they are forced to transfer their asset holdings to the

overconfidence insurance and paternalism it is well known that when agents are fully rational compulsory public insurance may make all agents better off in the rothschild and stiglitz 1976 model of insurance markets we find that when sufficiently many agents underestimate their personal risks compulsory insurance makes low risk agents worse off hence behavioral biases may weaken some of the well established rationales for government intervention based on asymmetric information

quantifying rural livelihood strategies in developing countries using an activity choice approach this article uses a quantitative activity choice approach based on identification of activity variables and application of latent class cluster analysis to identify five major rural livelihood strategies pursued by households n 576 in bolivia nepal and mozambique income sources and welfare outcomes are compared across strategies and household differences in asset holdings are analyzed using multinomial logit regression findings reveal that income diversification is the norm that a higher degree of specialization does not characterize more remunerative livelihood strategies that nonfarm income significantly contributes to higher income earnings that environmental reliance does not vary across strategies and that small scale farmers are the largest and poorest livelihood group some livelihood strategies are superior to all other strategies in terms of income earned access to more remunerative livelihood strategies is determined by land ownership education and ethnic affiliation finally the article also highlights that additional work is required to determine the most suitable methods for livelihood strategy identification

how do we know that real wages are too high it is common belief that the wages that we observe are above the level that would prevail in a competitive labour market and also it is common to believe that wage moderation should be encouraged as a way to keep unemployment down this paper considers whether we can have confidence in these beliefs it presents a number of models designed to cast doubt on the conventional wisdom first we show that in an efficiency wage model in which there is involuntary unemployment a binding minimum wage may increase employment we then present a general equilibrium matching model in which there is involuntary unemployment but wages are below market clearing levels and raising wages can reduce unemployment we then consider the empirical evidence on employment and wage determination to argue that it is just as consistent with this model as with models in which wages are at or above market clearing levels

overcoming adverse selection how public intervention can restore market functioning as illustrated by liquidity support equity injections and asset repurchases in financial crises and by imf credit lines to countries authorities often intervene in orderto revive markets that have dried up or to create newones in suchsituations agents participate only if they receive from the governmental scheme more than in the marketplace while the market outcome depends on who joins the scheme the paper provides a first analysis of market jumpstarting and its two way interaction between mechanism design and participation constraints in the model sellers in need of cash have private information about the value of their legacy asset the absence of buyer confidence forces authorities to intervene to jump start the market we characterize the optimal intervention and draw two main implications first the government should clean up the market through buybacks of the weakest assets and then through some equity injections and leave the agents with the strongest legacy assets to the market in particular authorities should not substitute fully for the market even when they have no comparative disadvantage in acquiring assets or shares thereof second the government creates its own competition by cleaning up the market from its most toxic pieces at the optimal intervention the government always strictly overpays for the legacy asset yet and unlike what would be suggested by coasian profit evasion the existence of a later market imposes no welfare cost while it is cast in a public intervention context the analysis of mechanismdependent reservation utilities also admits important private sector applications

thar she blows can bubbles be rekindled with experienced subjects we report 28 new experiment sessions consisting of up to three experience levels to examine the robustness of learning and error elimination among participants in a laboratory asset market and its effect on price bubbles our answer to the title question is yes we impose a large increase in liquidity and dividend uncertainty to shock the environment of experienced subjects who have converged to equilibrium and this treatment rekindles a bubble however in replications of that same challenging environment across three experience levels we discover that the environment yields a rare residual tendency to bubble even in the third experience session therefore a caveat must be placed on the effect of twice experienced subjects in asset markets in order for price bubbles to be extinguished the environment in which the participants engage in exchange must be stationary and bounded by a range of parameters experience including possible error elimination is not robust to major new environment changes in determining the characteristics of a price bubble jel c91 d83

asset float and speculative bubbles we model the relationship between asset float tradeable shares and speculative bubbles investors with heterogeneous beliefs and short sales constraints trade a stock with limited float because of insider lockups a bubble arises as price overweighs optimists beliefs and investors anticipate the option to resell to those with even higher valuations the bubble s size depends on float as investors anticipate an increase in float with lockup expirations and speculate over the degree of insider selling consistent with the internet experience the bubble turnover and volatility decrease with float and prices drop on the lockup expiration date

differences of opinion and international equity markets we develop an international financial market model in which domestic and foreign residents differ in their beliefs about the information content in public signals we determine how informational advantages of domestic investors in the interpretation of home public signals affect equity markets we evaluate the ability of our model to generate four international finance anomalies i the co movement of returns and capital flows ii home equity preference iii the dependence of firm returns on home and foreign factors and iv abnormal returns around foreign firm cross listing in the home market their relationships with empirical differences of opinion proxies are consistent with the model received january 15 2011 editorial decision may 16 2016 by editor geert bekaert

information and college access evidence from a randomized field experiment information and college access high school students from disadvantaged high schools in toronto were invited to take two surveys about three weeks apart half of the students taking the first survey were also shown a three minute video about the benefits of post secondary education pse and were invited to try out a financial aid calculator most students perceived returns to pse were high even among those not expecting to continue those exposed to the video especially those initially unsure about their own educational attainment reported significantly higher expected returns and lower concerns about costs and expressed a greater likelihood of pse attainment