Diverse Beliefs
General Finance
2010-01-12 v1 Pricing of Securities
Abstract
This paper presents a general framework for studying diverse beliefs in dynamic economies. Within this general framework, the characterization of a central-planner general equilbrium turns out to be very easy to derive, and leads to a range of interesting applications. We show how for an economy with log investors holding diverse beliefs, rational overconfidence is to be expected; volume-of-trade effects are effectively modelled; the Keynesian `beauty contest' can be modelled and analysed; and bubbles and crashes arise naturally. We remark that models where agents receive private information can formally be considered as models of diverse beliefs.
Keywords
Cite
@article{arxiv.1001.1450,
title = {Diverse Beliefs},
author = {Angus A Brown and L C G Rogers},
journal= {arXiv preprint arXiv:1001.1450},
year = {2010}
}