Optimism, pessimism and financial bubbles

Other publication: This paper shows that it is possible to extend the scope of the existence of rational bubbles when uncertainty is introduced associated with rank-dependent expected utility. This RDU assumption can be viewed as a transformation of probabilities depending on the pessimism/optimism of the agent. The results show that pessimism favors the existence of deterministic bubbles, when optimism may promote the existence of stochastic bubbles. Moreover, under pessimism, the RDU assumption may generate multiple bubbly equilibria. The RDU assumption also leads to new conditions ensuring the (absence of) Pareto-optimality of the competitive equilibrium without bubbles. These conditions still govern the existence of bubbles.

Author(s)

Bertrand Wigniolle

Date of publication
  • 2012
Keywords JEL
D81 D9 G1
Keywords
  • RDU preferences
  • Bulles rationnelles
  • Préférences RDU
  • Rational bubbles
  • RDU preferences
Version
  • 1