Optimal beliefs in the long run: An overlapping generations perspective

Yue Yuan

Economics Letters, 2012, vol. 117, issue 2, 525-527

Abstract: People have the natural tendency to be optimistic and believe that good outcomes in the future are more likely, but also want to avoid overestimation that could result in bad decision-making. Brunnermeier, Brunnermeier and Parker (2005) and Brunnermeier et al. (2007) established an optimal beliefs framework that balances these two incentives. This paper follows and extends the optimal beliefs framework to consider optimal beliefs in the long run in an overlapping generations sense. Assuming no short-selling, results show that, in almost all cases, there does not exist a stable and interior long-term optimal belief.

Keywords: Optimal expectations; Overlapping generations; Behavioral decision theory (search for similar items in EconPapers)
JEL-codes: D03 D83 D84 D91 G11 (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:117:y:2012:i:2:p:525-527

DOI: 10.1016/j.econlet.2012.06.052

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