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Keynesian Utilities: Bulls and Bears

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Abstract
We propose Keynesian utilities as a new class of non-expected utility functions representing the preferences of investors for optimism, defined as the composition of the investor's preferences for risk and her preferences for ambiguity. The optimism or pessimism of Keynesian utilities is determined by empirical proxies for risk and ambiguity. Bulls and bears are defined respectively as optimistic and pessimistic investors. The resulting family of Afriat inequalities are necessary and sufficient for rationalizing the asset demands of bulls and bears with Keynesian utilities.

Suggested Citation

  • Anat Bracha & Donald J. Brown, 2013. "Keynesian Utilities: Bulls and Bears," Cowles Foundation Discussion Papers 1891, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1891
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    References listed on IDEAS

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    1. Shannon, Chris & Zame, William R., 1999. "Quadratic Concavity and Determinacy of Equilibrium," Department of Economics, Working Paper Series qt3fv586x6, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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    3. Bracha, Anat & Brown, Donald J., 2012. "Affective decision making: A theory of optimism bias," Games and Economic Behavior, Elsevier, vol. 75(1), pages 67-80.
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    7. Agustin Roitman, 2011. "Precautionary Savings in a Small Open Economy Revisited," IMF Working Papers 2011/253, International Monetary Fund.
    8. Aumann, Robert J, 1987. "Correlated Equilibrium as an Expression of Bayesian Rationality," Econometrica, Econometric Society, vol. 55(1), pages 1-18, January.
    9. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56(4), pages 279-279.
    10. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
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    Cited by:

    1. Oliver Bunn & Caterina Calsamiglia & Donald Brown, 2013. "Testing for Fictive Learning in Decision-Making Under Uncertainty," Levine's Working Paper Archive 786969000000000660, David K. Levine.
    2. Donald J. Brown & Oliver Bunn & Caterina Calsamiglia & Donald J. Brown, 2013. "Fictive Learning in Choice under Uncertainty: A Logistic Regression Model," Cowles Foundation Discussion Papers 1890R, Cowles Foundation for Research in Economics, Yale University, revised Mar 2014.

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    More about this item

    Keywords

    Uncertainty; Optimism; Afriat inequalities;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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