Cahiers du CEREMADE

Unité Mixte de Recherche du C.N.R.S. N°7534
Abstract : We propose a model of endogeneous beliefs formation, leading to subjective and heterogeneous beliefs. Beliefs are considered as a strategic variable that agents can manipulate to maximize their utility from trade. Our framework is therefore an imperfect competition framework, and the underlying concept is the concept of Nash equilibrium. In such a strategic setting, the objective belief is not optimal and agents differ in their optimal beliefs. Optimism (resp. overconfidence) as well as pessimism (resp. doubt) both emerge as optimal beliefs. There is a positive correlation between pessimism (resp. doubt) and risk tolerance. The consensus belief is pessimistic and, as a consequence, the risk premium is higher than in a standard setting. Our model is embedded in a standard financial markets equilibrium problem and the strategic mechanism can be applied to several other situations (optimal recommendations for influential investors or gurus, choice of an optimal retention rate for an insurance company, choice of the optimal proportion of equity to retain for an entrepreneur and for a given project).
Strategic Beliefs
JOUINI Elyès, NAPP Clotilde
Université de PARIS - DAUPHINE
Place du Maréchal de Lattre De Tassigny - 75775 PARIS CEDEX 16 - FRANCE
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