Optimal expectations
Published
2002
Publisher
Woodrow Wilson School of Public and International Affairs
Description
"This paper introduces a tractable, structural model of subjective beliefs. Forward-looking agents care about expected future utility flows, and hence have higher current felicity if they believe that better outcomes are more likely. On the other hand, biased expectations lead to poorer decisions and worse realized outcomes on average. Optimal expectations balance these forces by maximizing average felicity. A small bias in beliefs typically leads to first-order gains due to increased anticipatory utility and only to second-order costs due to distorted behavior. We show that in a portfolio choice problem, agents overestimate the return on their investment and exhibit a preference for skewness. In general equilibrium, agents' prior beliefs are endogenously heterogeneous. Finally, in a consumption-saving problem with stochastic income, agents are both overconfident and overoptimistic"--National Bureau of Economic Research web site.
Subjects
A cross-national and longitudinal study of product-country images with a focus on the U.S. and Japan
The evolution of confidence for European consumers and businesses in France, Germany and Italy
Trust and reputation for service-oriented environments
Everyone's a critic
The usefulness of consumer confidence indexes in the United States
Fogyasztói bizalom
Frequently Asked Questions
Who is the author of Optimal expectations?
Optimal expectations was written by Markus Konrad Brunnermeier.
When was Optimal expectations published?
The publication date for this specific edition is 2002. The original work may have been published on a different date.