bubbles and experience an experiment we investigate the occurrence of bubble crash pricing patterns in laboratory financial markets with a mixture of experienced and inexperienced traders we find that even with a minority of experienced traders bubbles are substantially abated

environmental protection rare disasters and discount rates the stern review s evaluation of environmental protection stresses low discount rates and uncertainty about environmental effects an appropriate model for analysing this uncertainty and the associated discount rates requires sufficient risk aversion and fat tailed uncertainty to account for the observed equity premium calibrations based on epstein zin preferences and existing analyses of rare macroeconomic disasters suggest that optimal environmental investment can be a significant share of gdp even with reasonable rates of time preference optimal environmental investment increases with risk aversion and the probability and typical size of environmental disasters but decreases with uncertainty about policy effectiveness

deflating asset price bubbles with leverage constraints and monetary policy abstract we develop an experimental production economy to study the general equilibrium and welfare effects of speculation and stabilization policies participants playing the role of household investors interact in labor output and in some treatments asset markets without the ability to trade assets participants over supply costly labor to acquire saving the presence of asset markets improves welfare by allowing investors to substitute labor income for speculative gains asset prices deviate substantially from fundamental value leverage constraints that prevent investors from borrowing for speculation are ineffective at stabilizing asset prices households often circumvent the constraints by excessively supplying labor and generating increased wealth which can be used for speculation wealth inequality is worsened due to endogenously higher interest accumulated by borrowers and savers an asset inflation targeting policy fuels initial asset price growth but as interest rates rise rapidly effectively deflates asset price deviations with learning the policy stabilizes asset prices and consequently interest rates which enhances welfare and reduces inequality we develop a model of heterogeneous expectations to rationalize our experimental findings

thar she bursts reducing confusion reduces bubbles to explore why bubbles frequently emerge in the experimental asset market model of smith suchanek and williams 1988 we vary the fundamental value process constant or declining and the cash to asset value ratio constant or increasing we observe high mispricing in treatments with a declining fundamental value while overvaluation emerges when coupled with an increasing c a ratio a questionnaire reveals that the declining fundamental value process confuses subjects as they expect the fundamental value to stay constant running the experiment with a different context stocks of a depletable gold mine instead of stocks significantly reduces mispricing and overvaluation as it reduces confusion jel c91 d14 g11 g12

do regulations work a comprehensive analysis of price limits and trading restrictions in experimental asset markets with deterministic and stochastic fundamental values abstract we examine how traders react to two prominent stock market regulations under a constant fundamental value fv process price limits and trading restrictions significantly reduce the price level and mispricing size when traders are inexperienced under a markov process fv there is no evidence for these regulations to reduce mispricing the novel markov process also serves as a testbed for several financial hypotheses related to the regulations we find that price limits do not improve reactions to market news and the binding of price limits magnifies the momentum in the price movements these findings suggest that the scope of these regulations is limited and that they can backfire in some market environments

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

willingness to pay and the distribution of risk and wealth willingness to pay wtp most economists believe is an appropriate benefits metric for government expenditure and regulatory policies that reduce risks to human life it depends however on the distribution of risk and wealth currently society s expenditures overemphasize concentrated risks say after the fact treatment as opposed to prevention a dead anyway effect complements excess attention to intense interests in explaining this our normative criterion for spending on risk reduction is what a rational albeit uninsured individual confronting lotteries on future risks to life and wealth would choose for himself this requires correcting wtp to eliminate the dead anyway effect but continues to reflect that wealth enhances the utility of living

traders expectations in asset markets experimental evidence we elicit traders predictions of future price trajectories in repeated experimental markets for a 15 period lived asset we find that individuals beliefs about prices are adaptive and primarily based on past trends in the current and previous markets in which they have participated most traders do not anticipate market downturns the first time they participate in a market and when experienced they typically overestimate the time remaining before market peaks and downturns occur when prices deviate from fundamental values belief data are informative to an observer in predicting the direction of future price movements and the timing of market peaks

imagined risks and cost benefit analysis everyone recognizes substantial discrepancies between the public s rankings of hazards and those of the experts for example experts at the environmental protection agency think that hazardous waste sites pose mediumto low risks to the public while indoor air pollution poses a high risk yet public perceptions have driven policy to focus on hazardous waste sites rather than on indoor air quality stephen breyer 1993 pp 19 20 whose beliefs should determine government policy when the public s beliefs differ from those of the experts the problem evaporates if the public perhaps recognizing its inability to deal with complex technical issues entrusts risk assessment to the government and its experts but what if the public perhaps distrusting government and experts is unwilling to leave risk assessment to the experts paul portney 1992 p 131 posed a version of this whose beliefs question succinctly in his fable trouble in happyville

price bubbles and crashes in experimental call markets abstract price bubbles relative to intrinsic dividend value are observed using a call market trading institution market prices tend to track intrinsic value only when the same group of highly experienced traders participate in three consecutive 15 round markets

the impact of monetary policy on stock market bubbles and trading behavior evidence from the lab we investigate the effect of monetary policy on stock market bubbles and trading behavior in experimental asset markets we introduce the possibility of investing in interest bearing bonds to the widely used laboratory asset market design of smith et al 1988 treatment groups face a variable interest rate policy which depends on asset prices while control groups are subjected to a constant interest rate we observe a strong impact of our interest rate policy on liquidity in the stock market but only a small impact on bubbles however we find that announcing the possibility of reserve requirements significantly reduces bubbles

equity axioms for public risks from the perspective of a two person society we explain and analyze six axioms for equity among individuals who are exposed to the possibility of death from a public hazard the axioms are concerned with how a given total risk expected fatalities is distributed over the four possible life death consequences for the two people maximal subsets of mutually compatible equity axioms are identified first for a monotonic ordinal utility function and then for a more restrictive von neumann morgenstern utility function

utilitarianism egalitarianism and the timing effect in social choice problems two theorems are derived about social choice functions which are defined on comprehensive convex subsets of utility allocation space theorem 1 asserts that a linearity condition together with pareto optimality implies that a social choice function must be utilitarian theorem 2 asserts that a concavity condition together with pareto optimality and independence of irrelevant alternatives implies that a social choice function must be either utilitarian or egalitarian these linearity and concavity conditions have natural interpretations in terms of the timing of social welfare analysis before or after the resolution of uncertainties and its impact on social choices

to see is to believe common expectations in experimental asset markets abstract we experimentally manipulate agents information regarding the rationality of others in a setting in which previous studies have found irrationality to be present namely the asset market experiments introduced by smith et al 1988 recent studies suggest that mispricing in such markets may be an artefact of confusion which can be reduced by training subjects to understand the diminishing fundamental value we reconsider this view and propose that when it is made public knowledge that training has occurred this may also reduce uncertainty over the behavior of others and facilitate the formation of common expectations our design disentangles the direct effect of training from the indirect effect of its public knowledge and our results demonstrate a distinct and statistically significant effect of public knowledge over and above that of training alone

regulation in happyville how does risk perception affect risk regulation happyville is a society in which citizens wrongly believe that the drinking water supply is contaminated we discuss conditions under which a benevolent director of environment protection would invest in a water cleanup technology this holds if the director is populist namely if he maximises social welfare based on citizens pessimistic beliefs more surprisingly investment in the water cleanup technology may occur if the director is paternalistic in the sense that he maximises social welfare based on his own beliefs the reason is that he must take into account citizens responses to regulation

modeling the societal impact of fatal accidents a number of proposals have been put forth regarding the proper way to model the societal impact of fatal accidents most of these proposals are based on some form of utility function asserting that the social cost or disutility of n lives lost in a single accident is a function of n a common view is that a single large accident is more serious than many small accidents producing the same number of fatalities hence 1 drawing upon a number of empirical studies we argue that there is insufficient justification for using any function of n fatalities to model societal impacts the inadequacy of such models is attributed in part to the fact that accidents are signals of future trouble the societal impact of an accident is determined to an important degree by what it signifies or portends an accident that causes little direct harm may have immense consequences if it increases the judged probability and seriousness of future accidents we propose that models based solely on functions of n be abandoned in favor of models that elaborate in detail the significant events and consequences likely to result from an accident

quadratic social welfare functions john harsanyi has provided an intriguing argument that social welfare can be expressed as a weighted sum of individual utilities his theorem has been criticized on the grounds that a central axiom that social preference satisfies the independence axiom has the morally unacceptable implication that the process of choice and considerations of ex ante fairness are of no importance this paper presents a variation of harsanyi s theorem in which the axioms are compatible with a concern for ex ante fairness the implied mathematical form for social welfare is a strictly quasi concave and quadratic function of individual utilities

bliss catastrophe and rational policy lotteries with infinite expected utility are inconsistent with the axioms of expected utility theory to rule them out either the set of permissible lotteries must be restricted to exclude at a minimum fat tailed distributions such as that underlying the st petersburg paradox and power laws that are popular in models of climate change or the utility function must be bounded this note explores the second approach and proposes a number of tractable specifications leading to utility functions that are bounded both from above and below this property is intimately related to that of increasing relative risk aversion as first hypothesized by arrow 1965

betrayal aversion evidence from brazil china oman switzerland turkey and the united states comment in a series of binary choice problems we investigate how a chooser s risk taking changes when others share in their personal risk either equally or unequally we find that when the safe option yields inequality the risky option is taken significantly more often on the other hand the inequality resulting from the risky choice does not affect risk taking we also find that choosers tend to be less risk averse in a one person context compared to when the risk also affects the payoff of another c72 d81 z13

fairness and social risk i unaggregated analyses this paper is the second of a two paper study of fairness issues for decisions that affect the benefits received and the risks encountered by a population the study examines fairness for individuals and for homogeneous groups within the population it considers fairness both for population benefit risk profiles and for probability distributions over profiles our study bases fairness on notions of envy among individuals and groups the first paper focused on fairness in profiles and profile distributions when benefits and risks are not aggregated the present paper uses individual preferences to assess fairness when benefits and risks are aggregated within groups or over the population it concentrates on intergroup envy measures and fairness indices that account for ways that aggregated benefits and risks might be allocated to members of groups or to groups within the population

expectations and bubbles in asset pricing experiments abstract we present results on expectation formation in a controlled experimental environment in each period subjects are asked to predict the next price of a risky asset the realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts in most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously these bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or positive feedback expectations of the participants we also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy

searching beyond the lamppost let s focus on economically relevant questions abstract experimental economics is in danger of behaving like the famous drunk who searches for his keys under the light even though he lost them in some dark corner it is argued that we are wasting our time and endangering the respect that other economists have for experimentalists by playing too much with some of our favorite toys like the dictator game rather than focus on new and economically relevant designs

should central banks respond to movements in asset prices in recent decades asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries in light of this experience how if at all should central bankers respond to asset price volatility we have addressed this issue in previous work bernanke and gertler 1999 the context of our earlier study was the relatively new but increasingly popular monetary policy framework known as inflation targeting see e g bernanke and frederic mishkin 1997 in an inflation targeting framework publicly announced medium term inflation targets provide a nominal anchor for monetary policy while allowing the central bank some flexibility to help stabilize the real economy in the short run the inflation targeting approach gives a specific answer to the question of how central bankers should respond to asset prices changes in asset prices should affect monetary policy only to the extent that they affect the central bank s forecast of inflation to a first approximation once the predictive content of asset prices for inflation has been accounted for there should be no additional response of monetary policy to assetprice fluctuations in use now for about a decade inflationtargeting has generally performed well in practice however so far this approach has not often been stress tested by large swings in asset prices our earlier research employed simulations of a small calibrated macroeconomic model to examine how an inflation targeting policy defined as one in which the central bank s instrument interest rate responds primarily to changes in expected inflation might fare in the face of a boom and bust cycle in asset prices we found that an aggressive inflationtargeting policy rule in our simulations one in which the coefficient relating the instrument interest rate to expected inflation is 2 0 substantially stabilizes both output and inflation in scenarios in which a bubble in stock prices develops and then collapses as well as in scenarios in which technology shocks drive stock prices intuitively inflation targeting central banks automatically accommodate productivity gains that lift stock prices while offsetting purely speculative increases or decreases in stock values whose primary effects are through aggregate demand conditional on a strong policy response to expected inflation we found little if any additional gains from allowing an independent response of central bank policy to the level of asset prices in our view there are good reasons outside of our formal model to worry about attempts by central banks to influence asset prices including the fact that as history has shown the effects of such attempts on market psychology are dangerously unpredictable hence we concluded that inflationtargeting central banks need not respond to asset prices except insofar as they affect the inflation forecast in the spirit of recent work on robust control the exercises in our earlier paper analyzed the performance of policy rules in worst case discussants robert shiller yale university glenn rudebusch federal reserve bank of san francisco kenneth rogoff harvard university

cost benefit analysis under uncertainty a note on weitzman s dismal theorem abstract weitzman s 2009 famous dismal theorem argues that fat tails in the distribution of warming may pose problems for cost benefit analysis as it may imply that society might be willing to exchange today s consumption for future consumption at an infinite rate his analysis is based on the stochastic discount factor we show that in situations in which the stochastic discount factor is applicable it is optimal for society to devote only a finite amount of resources to protect against climate change for general assumptions on the investment returns cost benefit analysis must consider the joint distribution of the marginal utility of future consumption and marginal returns to investment in the different future states of nature we explore the range of situations under which challenges for applying cost benefit analysis under uncertainty remain

dispersive equity and social risk dispersive equity is concerned with the impact of life threatening risks from alternative policy decisions on homogeneous groups in a population it is not addressed to the disutility of various numbers of fatalities that might occur but rather to how fatalities are distributed over the groups although dispersive equity has long been recognized as an important component of some policy decisions it has received little formal treatment within the matrix of salient factors for such decisions our purpose is to advance its formal development this is done within a formulation based on probability distributions over potential fatality sets the formulation gives rise to four distinct but not independent equity concepts individual risk equity group risk equity dispersive equity and social outcome equity each of these is analyzed but special attention is given to dispersive equity the paper also comments on relationships between total equity and its four components and between total equity and the dis

the effect of short selling on bubbles and crashes in experimental spot asset markets a series of experiments illustrate that relaxing short selling constraints lowers prices in experimental asset markets but does not induce prices to track fundamentals we argue that prices in experimental asset markets are influenced by restrictions on short selling capacity and limits on the cash available for purchases restrictions on short sales in the form of cash reserve requirements and quantity limits on short positions behave in a similar manner a simulation model based on delong et al 1990 generates average price patterns that are similar to the observed data asset market bubbles are persistent deviations of prices from fundamentals to the extent that bubbles exist they can influence investment levels and the allocation of capital and thereby have considerable economic effects in recognition of their potential importance the question of the existence and pervasiveness of bubbles has been a focus of extensive empirical investigation see e g shiller 1981 blanchard and watson 1982 diba and grossman 1988 and west 1988 these studies yield mixed results regarding the empirical relevance of bubble phenomena one source of the differences in conclusions may be that because the fundamental value of the assets cannot be observed tests of the presence of bubbles are joint tests with the particular specification of the process guiding the evolution of fundamentals also being tested the availability of short selling is widely believed to make bubble formation less likely one rationale for such a belief is the notion that the cause of asset market bubbles is a constraint on the ability of traders to speculate on future downward price movements see e g miller 1977 jarrow 1980 diamond and verrecchia 1987 or figlewski and webb 1993 in the absence of short sales traders may sell only the shares in their portfolios the availability of short sales relaxes this constraint in this paper we study empirically the effect of allowing short sales on both the incidence and magnitude of market bubbles we choose a setting in which the fundamental value of the asset is clearly and unambiguously defined and known at all times and bubbles typically occur namely we use the experimental environment that smith suchanek and williams 1988 introduce while

on the ingredients for bubble formation informed traders and communication bubbles in asset markets have been documented in numerous experiments most experiments in which bubbles occur feature a declining fundamental value this feature has been criticized for being atypical of real financial markets here we experimentally study other ingredients for bubble formation that are common in such markets namely the existence of inside information and communication among traders we find that bubbles and mirages can occur if these additional ingredients are present in particular the mere possibility that some traders are better informed than others can create bubbles surprisingly communication turns out to be counterproductive for bubble formation

monetary policy and financial imbalances facts and fiction following the financial crisis many have argued that monetary policy should lean against asset price increases and that deviations of credit and asset prices from trend can be used to capture financial imbalances we study quarterly data spanning 1986 2008 for a sample of 18 countries and argue that such measures contain little information useful for forecasting the future economic conditions this casts doubts on the leaning against the wind view we also argue that tightening monetary policy in response to such imbalances are likely to depress real growth substantially that finding however is sensitive to the lucas critique katrin assenmacher wesche and stefan gerlach

nonspeculative bubbles in experimental asset markets lack of common knowledge of rationality vs actual irrationality we report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets in a setting in which speculation is not possible bubbles and crashes are observed the results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation but rather by behavior that itself exhibits elements of irrationality much of the trading activity that accompanies bubble formation in markets where speculation is possible is due to the fact that there is no other activity available for participants in the experiment

the politics of government decision making a theory of regulatory capture the paper develops an agency theoretic approach to interest group politics and shows the following 1 the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation 2 the threat of producer protection leads to low powered incentive schemes for regulated firms 3 consumer politics may induce uniform pricing by a multiproduct firm 4 an interest group has more power when its interest lies in inefficient rather than efficient regulation where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal congress

news droughts news floods and u s disaster relief this paper studies the influence of mass media on u s government response to approximately 5 000 natural disasters occurring between 1968 and 2002 these disasters took nearly 63 000 lives and affected 125 million people per year we show that u s relief depends on whether the disaster occurs at the same time as other newsworthy events such as the olympic games which are obviously unrelated to need we argue that the only plausible explanation of this is that relief decisions are driven by news coverage of disasters and that the other newsworthy material crowds out this news coverage

eliciting von neumann morgenstern utilities when probabilities are distorted or unknown this paper proposes a new method the gamble tradeoff method for eliciting utilities in decision under risk or uncertainty the elicitation of utilities to be used in the expected utility criterion turns out to be possible even if probabilities are ambiguous or unknown a disadvantage of the tradeoff method is that a few more questions usually must be asked to clients also the lotteries that are needed are somewhat more complex than in the certainty equivalent method or in the probability equivalent method the major advantage of the tradeoff method is its robustness against probability distortions and misconceptions which constitute a major cause of violations of expected utility and generate inconsistencies in utility elicitation thus the tradeoff method retains full validity under prospect theory rank dependent utility and the combination of the two i e cumulative prospect theory the tradeoff method is tested for monetary outcomes and for outcomes describing life duration we find higher risk aversion for life duration but the tradeoff method elicits similar curvature of utility apparently the higher risk aversion for life duration is due to more pronounced deviations from expected utility

futures contracting and dividend uncertainty in experimental asset markets prices in experimental asset markets tend to bubble and then crash to dividend value at the end of the asset s useful life explanations for this phenomenon are 1 that participants cannot form reliable future price expectations or 2 dividend risk aversion we report the results of experiments to test these hypotheses in one experimental series a futures market is introduced so that participants can obtain information on future share prices in another series of experiments the per period dividend is known with certainty the futures market treatment reduced the bubble the certain dividend treatment had little effect on the character of bubbles with inexperienced traders copyright 1995 by university of chicago press

the social value of mortality risk reduction vsl vs the social welfare function approach we examine how different welfarist frameworks evaluate the social value of mortality risk reduction these frameworks include classical distributively unweighted cost benefit analysis i e the value per statistical life vsl approach and various social welfare functions swfs the swfs are either utilitarian or prioritarian applied to policy choice under risk in either an ex post or ex ante manner we examine the conditions on individual utility and on the swf under which these frameworks display sensitivity to wealth and to baseline risk moreover we discuss whether these frameworks satisfy related properties that have received some attention in the literature namely equal value of risk reduction preference for risk equity and catastrophe aversion we show that the particular manner in which vsl ranks risk reduction measures is not necessarily shared by other welfarist frameworks jel d81 d61 d63 q51

does membership payoff for covered workers a distributional analysis of the free rider problem this paper examines the union membership wage premium among private sector employees covered by collective bargaining agreements using current population survey data for 2000 2003 the author not only estimates the conditional mean wage premium the metric on which most previous research has focused but also employs recently developed instrumental quantile regression techniques to estimate the wage effect of membership across the wage distribution members enjoyed on average a wage premium of 9 over comparable covered nonmembers further analyses find no evidence that this mean premium is explained either by unobserved differences or by measurement error the author also finds that a narrow focus on the mean impact partially masks heterogeneity in the impact across the distribution notably membership wage effects were considerably more pronounced for low wage earners than for high wage earners

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

assessing risky social situations this paper reexamines the welfare economics of risk it singles out a class of criteria the expected equally distributed equivalent as the unique class that avoids serious drawbacks of existing approaches such criteria behave like ex post criteria when the final statistical distribution of well being is known ex ante and like ex ante criteria when risk generates no inequality the paper also provides a new result on the tension between inequality aversion and respect of individual ex ante preferences in the vein of harsanyi s aggregation theorem

attitudes toward catastrophe in light of climate change and other global threats policy commentators sometimes urge that society should be more concerned about catastrophes this paper reflects on what society s attitude toward low probability high impact events is or should be we first argue that catastrophe risk can be conceived of as a spread in the distribution of losses based on this conception we review studies from decision sciences psychology and behavioral economics that explore people s attitudes toward various social risks contray to popular belief we find more evidence against than in favor of catastrophe aversion the preference for a mean preserving contraction of the loss distribution and discuss a number of possible behavioral explanations next we turn to social choice theory and examine how various social welfare functions handle catastrophe risk we explain why catastrophe aversion may be in conflict with equity concerns and other regarding preferences finally we discuss current approaches to evaluate and regulate catastrophe risk

guilt in games a clear conscience is a good pillow why does this old proverb contain an insight the emotion of guilt holds a key psychologists report that the prototypical cause of guilt would be the infliction of harm loss or distress on a relationship partner roy baumeister arlene m stillwell and todd f heatherton 1994 245 june price tangney 1995 moreover guilt is unpleasant and may affect behavior to render the associated pangs counterfactual baumeister stillwell and heatherton state if people feel guilt for hurting their partners and for failing to live up to their expectations they will alter their behavior to avoid guilt in ways that seem likely to maintain and strengthen the relationship avoided guilt is the down of the sound sleeper s bolster how can guilt be modeled how are human interaction and economic outcomes influenced we offer a formal approach for providing answers start with an extensive game form which associates a monetary outcome with each end node say that player i lets player j down if as a result of i s choice of strategy j gets a lower monetary payoff than j expected to get before play started player i s guilt may depend on how much he lets j down player i s guilt may also depend on how much j believes i believes he lets j down we develop techniques to analyze equilibria when players are motivated in part by a desire to avoid guilt the intellectual home for our exercise is what has been called psychological game theory this framework originally developed by john geanakoplos david pearce and ennio stacchetti 1989 and recently extended by battigalli and dufwenberg 2005 henceforth b d allows players utilities to depend on beliefs about choices states of nature

on modeling and interpreting the economics of catastrophic climate change with climate change as prototype example this paper analyzes the implications of structural uncertainty for the economics of low probability high impact catastrophes even when updated by bayesian learning uncertain structural parameters induce a critical tail fattening of posterior predictive distributions such fattened tails have strong im plications for situations like climate change where a catastrophe is theoretically possible because prior knowledge cannot place sufficiently narrow bounds on overall damages this paper shows that the economic consequences of fat tailed structural uncertainty along with unsureness about high temperature damages can readily outweigh the effects of discounting in climate change policy analysis

the effect of risk characteristics on the willingness to pay for mortality risk reductions from electric power generation the objective of this study is to estimate willingness to pay wtp for the reduction of mortality risks caused by fossil fuel natural gas coal and oil versus nuclear electric power generation systems and to examine the influence of risk characteristics involved with electric power generation on wtp a choice experiment was conducted to achieve these objectives the attributes for nuclear risks in the experiment included the probability of disasters and the expected losses if a disaster occurs we find evidence of i a baseline effect where wtp is sensitive to hypothetical versus actual baseline expected mortality ii a labeling effect where surprisingly the term nuclear has no effect on wtp but the term fossil fueled power generation results in lower wtp and iii disaster aversion meaning that people focus on the conditional loss from a nuclear disaster not the probability we also find that the wtp for reducing deaths from a nuclear disaster is about 60 times the wtp for routine reducing fossil fuel generation related deaths