Preferences over risky alternatives can be elicited by different methods, including direct pairwise choices and willingness-to-accept valuations. The results are frequently at odds, casting doubts on the foundations of economics. We develop a stochastic choice model predicting when...

Even if an asset has no fundamental uncertainty with a constant dividend process, a stochastic sentiment-driven equilibrium for the asset price exists besides the well-known unique fundamental equilibrium. Our paper constructs such sentiment-driven equilibria under general utility functions...

Investors are said to "abhor uncertainty", but if there were no uncertainty they could earn only the risk-free rate. A fundamental result in the analytical accounting literature shows that investors buying into a CARA-normal CAPM market pay lower asset prices, earn higher expected returns, and...

This paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered price-setting. Rotemberg and Woodford (1997) and Woodford (2002) have shown that under certain conditions, a local approximation to the expected utility of the representative...

This note shows that the Generalized Expected Discounted Utility (GEDU) model is not dynamically consistent and does not allow for a complete separation of the parameters characterizing risk aversion and the elasticity of intertemporal substitution (EIS). Therefore, the model is not convenient...

Risk management is critical in decision-making, and mean-variance (MV) trade-off is one of the most common criteria. However, in reinforcement learning (RL) under a dynamic environment, MV control is not as easy as that under a static environment owing to computational difficulties. For MV...

The random Incentive System (RIS) is a standard method to incentivize participants in economic experiments. However, recent theoretical studies point out the possibility of its failure under ambiguity. We propose a modification of RIS, named independent RIS (I-RIS), to improve its reliability....

Skewness preferences—preferences toward low-probability, high-impact risks—are crucial determinants of economic behavior. This paper defines first- and higher-order skewness preferences and shows that the order of skewness preference captures the importance of skewness relative to mean and...

This paper evaluates how initial beliefs uncertainty can affect data weighting and the estimation of models with adaptive learning. One key finding is that misspecification of initial beliefs uncertainty, particularly with the common approach of artificially inflating initials uncertainty to...