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An agent-based model of rational optimism
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International Journal of Risk Assessment and Management, 2018 Vol.21 No.3, pp.155 - 183
We prove that, in standard insurance markets, rational agents have an incentive to choose as subjective probabilities those incurring in an optimism bias, since they imply real and objective net gains. Our agent-based model of insurance markets thus clarifies how rational optimism naturally appears and persists in insurance markets, opening up the possibility to explain the optimism bias observed in other environments on the basis of the theory of salient perturbations. Our findings are consistent with the empirical evidence showing a systematic and coherent moderate optimism bias of agents in the assessment of probabilities.
Agent-based stochastic model; dynamical optimisation in economics; general equilibrium model; Arrow-Debreu securities; subjective probabilities; rationality; optimism bias; game theory.
Revisión por pares
Pedro J. Gutiérrez Diez gratefully acknowledges financial support from Spanish Office of Economy and Competitiveness and European FEDER Funds, research projects MTM2014-56022-C2-2-P and MTM2017-85476-C2-1-P.
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