Emergency Preparation and Uncertainty Persistence

Savitar Sundaresan ()
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Savitar Sundaresan: Business School, Imperial College London, London SW7 2AZ, United Kingdom

Management Science, 2024, vol. 70, issue 5, 2842-2861

Abstract: Unusual events trigger persistent spikes in uncertainty. Standard models cannot match these dynamic patterns. This paper presents a unified framework, motivated by the literature on inattention. Agents choose whether and how to prepare for different possible states of the world by collecting information. Agents optimally ignore sufficiently unlikely events, so the occurrence of such events does not resolve, but rather increases, uncertainty. Uncertain agents have dispersed beliefs, making it harder to focus future preparation. Thus, uncertainty begets uncertainty for an inattentive agent, endogenously persisting. In a financial application, this framework matches patterns in volatility, volume of trade, belief dispersion, and spreads.

Keywords: economics; behavior and behavioral decision making; finance; asset pricing (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:5:p:2842-2861

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