Diverse Beliefs

Angus A Brown and L C G Rogers

Abstract: This paper presents a general framework for studying diverse beliefs in dynamic economies. Within this general framework, the characterization of a central-planner general equilbrium turns out to be very easy to derive, and leads to a range of interesting applications. We show how for an economy with log investors holding diverse beliefs, rational overconfidence is to be expected; volume-of-trade effects are effectively modelled; the Keynesian `beauty contest' can be modelled and analysed; and bubbles and crashes arise naturally. We remark that models where agents receive private information can formally be considered as models of diverse beliefs.

Date: 2010-01
New Economics Papers: this item is included in nep-cba
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