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Some properties of subjective probabilities induced by optimal expectations

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  • Iwaki, Hideki
  • Osaki, Yusuke

Abstract

In this paper, we examine the properties of subjective probabilities induced by optimal expectations. We show that investors who follow optimal expectations underweigh small probabilities and overweigh large probabilities in a simple binary economy. This indicates that the subjective probabilities induced by optimal expectations are incompatible with experimentally observed results under the rank dependent probability assumption.

Suggested Citation

  • Iwaki, Hideki & Osaki, Yusuke, 2010. "Some properties of subjective probabilities induced by optimal expectations," Finance Research Letters, Elsevier, vol. 7(2), pages 98-102, June.
    • Handle: RePEc:eee:finlet:v:7:y:2010:i:2:p:98-102
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    References listed on IDEAS

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