Economics of Self-Feeding Fear

Kiyohiko G. Nishimura and Hiroyuki Ozaki
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Kiyohiko G. Nishimura: Faculty of Economics, University of Tokyo
Hiroyuki Ozaki: Faculty of Economics, Tohoku University

No CIRJE-F-175, CIRJE F-Series from CIRJE, Faculty of Economics, University of Tokyo

Abstract: A model of self-feeding fear is presented. Suppose that an economic agent is (1-ƒÃ)x100% certain that uncertainty she faces is characterized by a particular probability measure, but that she has a fear that, with ƒÃx100% chance, her conviction is completely wrong and she is left perfectly ignorant about the true measure in the present as well as in the future. We call this situation ƒÃ-contamination of confidence. In this situation, if the economic agent follows Bayesian procedure or its variant, which is considered as rational in the theory of economics, her confidence erodes after having new observation.

Pages: 24 pages
Date: 2002-09
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:tky:fseres:2002cf175

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