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Economics of Pessimism and Optimism

Theory of Knightian Uncertainty and Its Applications

  • Kiyohiko G. Nishimura
  • Hiroyuki Ozaki

Table of contents

  1. Front Matter
    Pages i-xx
  2. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 1-28
  3. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 29-50
  4. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 51-75
  5. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 77-82
  6. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 83-90
  7. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 91-111
  8. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 113-121
  9. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 123-136
  10. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 137-159
  11. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 161-184
  12. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 185-198
  13. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 231-244
  14. Kiyohiko G. Nishimura, Hiroyuki Ozaki
    Pages 245-254
  15. Back Matter
    Pages 255-326

About this book

Introduction

This is the first book to investigate the pessimistic and optimistic perceptions of the future and their economic consequences, based on sound mathematical foundations. The book focuses on fundamental uncertainty (Knightian uncertainty), where the probability distribution governing uncertainty is unknown, and it provides the reader with methods to formulate how pessimism and optimism act in an economy in a strict and unified way. After presenting decision-theoretic foundations for prudent behaviors under Knightian uncertainty, the book applies these ideas to economic models that include portfolio inertia, indeterminacy of equilibria in the Arrow-Debreu economy and in a stochastic overlapping-generations economy, dynamic asset-pricing models, search, real options, liquidity preferences, and learning. The book also includes characterizations of pessimistic (ε-contaminated) and optimistic (ε-exuberant) behaviors under Knightian uncertainty and the persistence of human pessimism (surprise aversion) and optimism (surprise affinity). These characterizations are shown to be useful in understanding behaviors that were observed during the global financial crisis and its aftermath. This book is highly recommended not only to researchers wanting to understand the mechanism of how pessimism and optimism affects economic phenomena, but also to policy-makers contemplating effective economic policies that delicately hinge upon the mindsets of people in the market.

Keywords

Decision theory Knightian uncertainty Optimism Pessimism Uncertainty

Authors and affiliations

  • Kiyohiko G. Nishimura
    • 1
  • Hiroyuki Ozaki
    • 2
  1. 1.National Graduate Institute for Policy Studies (GRIPS)Minato-kuJapan
  2. 2.Faculty of EconomicsKeio UniversityMinato-kuJapan

Bibliographic information