IDEAS home Printed from https://ideas.repec.org/a/eee/ecolet/v117y2012i2p525-527.html
   My bibliography  Save this article

Optimal beliefs in the long run: An overlapping generations perspective

Author

Listed:
  • Yuan, Yue

Abstract

People have the natural tendency to be optimistic and believe that good outcomes in the future are more likely, but also want to avoid overestimation that could result in bad decision-making. Brunnermeier, Brunnermeier and Parker (2005) and Brunnermeier et al. (2007) established an optimal beliefs framework that balances these two incentives. This paper follows and extends the optimal beliefs framework to consider optimal beliefs in the long run in an overlapping generations sense. Assuming no short-selling, results show that, in almost all cases, there does not exist a stable and interior long-term optimal belief.

Suggested Citation

  • Yuan, Yue, 2012. "Optimal beliefs in the long run: An overlapping generations perspective," Economics Letters, Elsevier, vol. 117(2), pages 525-527.
    • Handle: RePEc:eee:ecolet:v:117:y:2012:i:2:p:525-527
    DOI: 10.1016/j.econlet.2012.06.052
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165176512003850
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econlet.2012.06.052?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September.
    2. Markus K. Brunnermeier & Jonathan A. Parker & Christian Gollier, 2007. "Optimal Beliefs, Asset Prices, and the Preference for Skewed Returns," American Economic Review, American Economic Association, vol. 97(2), pages 159-165, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aissia, Dorsaf Ben, 2014. "IPO first-day returns: Skewness preference, investor sentiment and uncertainty underlying factors," Review of Financial Economics, Elsevier, vol. 23(3), pages 148-154.
    2. Jondeau, Eric & Zhang, Qunzi & Zhu, Xiaoneng, 2019. "Average skewness matters," Journal of Financial Economics, Elsevier, vol. 134(1), pages 29-47.
    3. D’Hondt, Catherine & De Winne, Rudy & Merli, Maxime, 2021. "Do retail investors bite off more than they can chew? A close look at their return objectives," Journal of Economic Behavior & Organization, Elsevier, vol. 188(C), pages 879-902.
    4. Yao, Jing & Zheng, Zexin, 2021. "Costly arbitrage and skewness pricing: Evidence from first-day price limit reform in China," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    5. Cheng, Ing-Haw & Hsiaw, Alice, 2022. "Distrust in experts and the origins of disagreement," Journal of Economic Theory, Elsevier, vol. 200(C).
    6. Roland Bénabou, 2013. "Groupthink: Collective Delusions in Organizations and Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 80(2), pages 429-462.
    7. Annaert, Jan & De Ceuster, Marc & Verstegen, Kurt, 2013. "Are extreme returns priced in the stock market? European evidence," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3401-3411.
    8. Yigit Atilgan & K. Ozgur Demirtas & A. Doruk Gunaydin & Imra Kirli, 2023. "Average skewness in global equity markets," International Review of Finance, International Review of Finance Ltd., vol. 23(2), pages 245-271, June.
    9. Phan, Thi Nha Truc & Bertrand, Philippe & Vo, Xuan Vinh & Jones, Kirsten, 2023. "Investigating financial decision-making when facing skewed distributions of return: A survey study in Vietnam," The Quarterly Review of Economics and Finance, Elsevier, vol. 87(C), pages 318-329.
    10. Lambert, M. & Hübner, G., 2013. "Comoment risk and stock returns," Journal of Empirical Finance, Elsevier, vol. 23(C), pages 191-205.
    11. Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
    12. Lepone, Grace & Yang, Zhini, 2020. "Do early birds behave differently from night owls in the stock market?," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    13. Mohrschladt, Hannes & Schneider, Judith C., 2021. "Option-implied skewness: Insights from ITM-options," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).
    14. Ohk, Seungbin & Ju, Biung-Ghi, 2021. "Capitalizing on prospect theory value: The Asian developed stock markets," Japan and the World Economy, Elsevier, vol. 57(C).
    15. Windsor, Callan & La Cava, Gianni & Hansen, James, 2015. "Home price beliefs: Evidence from Australia," Journal of Housing Economics, Elsevier, vol. 29(C), pages 41-58.
    16. Wang, Xianhe & Ouyang, Yuliang & Li, You & Liu, Shu & Teng, Long & Wang, Bo, 2023. "Multi-objective portfolio selection considering expected and total utility," Finance Research Letters, Elsevier, vol. 58(PD).
    17. Armouti-Hansen, Jesper & Kops, Christopher, 2024. "Managing anticipation and reference-dependent choice," Journal of Mathematical Economics, Elsevier, vol. 112(C).
    18. Mitton, Todd & Vorkink, Keith & Wright, Ian, 2018. "Neighborhood effects on speculative behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 151(C), pages 42-61.
    19. Schwardmann, Peter, 2019. "Motivated health risk denial and preventative health care investments," Journal of Health Economics, Elsevier, vol. 65(C), pages 78-92.
    20. Dallin M. Alldredge, 2020. "Institutional trading, investor sentiment, and lottery‐like stock preferences," The Financial Review, Eastern Finance Association, vol. 55(4), pages 603-624, November.

    More about this item

    Keywords

    Optimal expectations; Overlapping generations; Behavioral decision theory;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecolet:v:117:y:2012:i:2:p:525-527. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ecolet .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.