Consensus Belief Research Articles

Do heterogeneous beliefs diversify market risk?

It is believed that diversity is good for our society, but is it good for financial markets? In particular, does the diversity with respect to beliefs among investors reduce the market risk of risky assets? The current paper aims to answer this question. Within the standard mean–variance framework, we introduce heterogeneous beliefs not only in risk preferences and expected payoffs but also in variances/covariances. By aggregating heterogeneous beliefs into a market consensus belief, we obtain capital asset pricing model-like equilibrium price and return relationships under heterogeneous beliefs. We show that the market aggregate behaviour is in principle a weighted average of heterogeneous individual behaviours. The impact of heterogeneity on the market equilibrium price and risk premium is examined in general. In particular, we give a positive answer to the question in the title by considering some special structure in heterogeneous beliefs. In addition, we provide an explanation of Miller's long-standing hypothesis on the relation between a stock's risk and the divergence of opinions.

Evolutionary Strategic Beliefs and Financial Markets

We provide a discipline for belief formation through a model of subjective beliefs, in which agents hold strategic beliefs. More precisely, we consider beliefs as a strategic variable that agents can choose (consciously or not) in order to maximize their utility at the equilibrium. These strategic beliefs result from an evolutionary process. We find that evolutionary strategic behavior leads to belief subjectivity and heterogeneity. Optimism (resp. overconfidence) as well as pessimism (resp. doubt) both emerge from the evolution process. Furthermore, we obtain a positive correlation between pessimism (rep. doubt) and risk-tolerance. We analyse the equilibrium characteristics. Under reasonable assumptions, the consensus belief is pessimistic and, as a consequence, the risk premium is higher than in a standard setting.

Impact of Medicare Part D on independent and chain community pharmacies in rural Illinois—A qualitative study

Background Although the sustainability of rural pharmacy services is a concern of long standing, the rural marketplace is not monolithic. Enhanced understanding of different experiences, strengths, and potential weaknesses of rural chain and independent pharmacies could help inform health policy debates, legislation, and consideration of disparities and access. This study compared and contrasted experiences by pharmacists in chain and independent community pharmacies during Medicare Part D implementation. Objective The objective was to obtain and describe experiential narratives from rural Illinois pharmacists regarding the implementation of Medicare Part D. Similarities and differences experienced in chain and independent community pharmacies were examined, as well as pharmacists' perceptions about potential implications of the newly implemented Act on the accessibility of rural pharmacy care and services. Methods A semistructured qualitative research approach was used, involving focus groups and telephone interviews, to elicit the subjective experiences of rural Illinois pharmacists. Participants were selected through purposive sampling to include representative perspectives of independent and chain community pharmacists in rural areas across the state. Using a systematic, iterative coding process, recurrent themes were identified in 8 substantive categories. Results Areas of similarity between the 2 groups included universal criticism of the initial implementation processes, but consensus belief that Medicare patients ultimately benefited if they did not have previous prescription drug coverage. Pharmacists in independent drugstores expressed more concern about their future viability. Corporate communications and infrastructure support were available in chain pharmacies and believed to present them with competitive advantages and a stronger long-term financial position. Conclusions The findings showed a disparate impact of Medicare Part D on the initial experiences and perceived viability of independent community pharmacies, in comparison with their chain pharmacy counterparts. The long-term implications of changing regulatory environments and customers' pharmacy needs in underserved communities should be carefully considered and monitored.

Ensemble clustering in the belief functions framework

In this paper, belief functions, defined on the lattice of intervals partitions of a set of objects, are investigated as a suitable framework for combining multiple clusterings. We first show how to represent clustering results as masses of evidence allocated to sets of partitions. Then a consensus belief function is obtained using a suitable combination rule. Tools for synthesizing the results are also proposed. The approach is illustrated using synthetic and real data sets.

A Binomial Model of Asset and Option Pricing with Heterogeneous Beliefs

This paper provides a difference-in-opinions equilibrium framework for pricing asset and option in a multi-period binomial economy with heterogeneous beliefs. Agents agree to disagree about their beliefs on the probability and asset return in each state of nature. By constructing a consensus belief, we examine the impact of heterogeneous beliefs on market equilibrium. We show that agents’ wealth shares are expected to remain the same under the consensus belief, although they are expected to increase under their own beliefs. Also large disagreement leads to lower risk premium, while high disagreement on the future return in up state (down state) leads to lower (higher) risk-free rate and expected return for the risky asset. Furthermore, under the consensus belief, the implied volatility of the call options exhibits some observed patterns widely documentedin option markets.

Influential Listeners: An Experiment on Persuasion Bias In Social Networks

This paper presents an experimental investigation of persuasion bias, a form of bounded rationality whereby agents communicating through a social network are unable to account for possible repetitions in the information they receive. The results indicate that network structure plays a significant role in determining social influence. However, the most influential agents are not those with more outgoing links, as predicted by the persuasion bias hypothesis, but those with more incoming links. We show that a boundedly rational updating rule that takes into account not only agents' outdegree, but also their indegree, provides a better explanation of the experimental data. In this framework, consensus beliefs tend to be swayed towards the opinions of influential listeners. We then present an effort-weighted updating model as a more general characterization of information aggregation in social networks.

Experience, Information Asymmetry and Rational Forecast Deviation

Using a stylized construct where analysts wish to minimize their forecasting error, we model forecasted earnings when firm characteristics and prior forecasts are public information but analysts can gain private information by appeasing management via deviating from the consensus. Combining endogenously acquired private information with consensus beliefs, analysts determine the optimal forecast deviation. We analytically show and empirically verify that the degree of rational deviation is influenced by analysts' experience and the degree of information asymmetry about the firm's prospects. An analyst's rational deviation increases with information asymmetry, but is concavely related with experience, i.e., deviation increases with analyst experience but actually decreases when an analyst is a novice or highly seasoned.

Shakespeare Authorship Doubt in 1593

Beliefs acquired from authoritative sources and maintained over time, tend to achieve the status of truths. As a result, though there are many possible ways of interpreting historical data, consensus beliefs are so powerful a determinant of interpretive outcomes that new interpretations of historical evidence will tend to be rare. In addition, any evidence that conflicts radically with a belief that has achieved the status of a truth will logically be dismissed. Such, historically, has been the status of the Shakespeare authorship question. Since we know who wrote the Shakespeare canon, there is no apparent point to research.

Are Risk Averse Agents More Optimistic? A Bayesian Estimation Approach

Our aim is to analyze the link between optimism and risk aversion in a subjective expected utility setting and to estimate the average level of optimism when weighted by risk tolerance. This quantity is of particular importance since it characterizes the consensus belief in risk-taking situations with heterogeneous beliefs. Its estimation leads to a nontrivial statistical problem. We start from a large lottery survey (1,536 individuals). We assume that individuals have true unobservable characteristics and that their answers in the survey are noisy realizations of these characteristics. We adopt a Bayesian approach for the statistical analysis of this problem and use an hybrid MCMC approximation method to numerically estimate the distributions of the unobservable characteristics. We obtain that individuals are on average pessimistic and that pessimism and risk tolerance are positively correlated. As a consequence, we conclude that the consensus belief is biased towards pessimism.

Using a sledgehammer to crack a walnut: the modern management of concussion

Using a sledgehammer to crack a walnut: the modern management of concussion

Zero-Beta CAPM with Heterogeneous Beliefs

This paper extends the standard Black's zero-beta CAPM with homogeneous beliefs to the case with heterogeneous beliefs in terms of risk aversion coefficients, expected payoffs, and variance/covariance matrices of the payoffs of risky assets among heterogeneous agents within the mean-variance framework. Investors are bounded rational in the sense that they make their optimal decision based on their beliefs. By introducing and constructing a consensus belief of the market, we obtain equilibrium prices of risky assets and show that Black's zero-beta CAPM holds under the consensus belief. Various impacts of heterogeneity on the market equilibrium and agents' optimal portfolios are analyzed. In particular, we show that under market aggregation, the biased belief (from the market belief) of investors makes the optimal portfolio of the investor be mean-variance inefficient while the market portfolio is always on the efficient frontier. This demonstrates that, within this framework, bounded rational investors may never achieve their mean-variance efficiency under aggregation. At the same time, the efficiency of the whole market, measured by the efficiency of the market portfolio, can be achieved. The results also shed a light on the empirical finding that managed funds under-perform comparing to the market indices on average.

An application of formal argumentation: Fusing Bayesian networks in multi-agent systems

We consider a multi-agent system where each agent is equipped with a Bayesian network, and present an open framework for the agents to agree on a possible consensus network. The framework builds on formal argumentation, and unlike previous solutions on graphical consensus belief, it is sufficiently general to allow for a wide range of possible agreements to be identified.

Are More Risk-Averse Agents More Optimistic? Insights from a Simple Rational Expectations Equilibrium Model

We analyze the link between pessimism and risk-aversion. We consider a model of partially revealing, competitive rational expectations equilibrium with diverse information, in which the distribution of risk-aversion across individuals is unknown. We show that when a high individual level of risk-aversion is taken as a signal for a high average level of risk-aversion, more risk-averse agents are more optimistic. This correlation between individual risk-aversion and optimism leads to a pessimistic consensus belief hence to an increase in the market price of risk. Risk-sharing schemes and welfare implications are analyzed. We show that agents' welfare may increase upon the receipt of more precise information.

Restrained and Unrestrained Eaters' Attributions of Success and Failure to Body Weight and Perception of Social Consensus: The Special Case of Romantic Success

Restrained and unrestrained eaters' attributions of success and failure to body weight were explored in two studies. Study 1 showed that when presented with statements attributing life outcomes to body weight, restrained eaters associated thinness with success significantly more than unrestrained eaters did, particularly in the professional and romantic areas of life. This study also showed that both groups assume a strong social consensus for their respective positions regarding the importance of thinness for social and personal success. However, in the case of romantic success, unrestrained eaters also assumed social consensus for the proposition that thinness is essential to romantic success, despite not agreeing with this proposition themselves. Study 2 showed that, when making attributions for the success or failure of a supposedly real woman, restrained eaters attributed her romantic success to thinness and her romantic failure to being overweight, whereas unrestrained eaters' attributions for success and failure remained uninfluenced by weight. Restrained eaters' consistent association of romantic success and thinness is discussed in terms of self–esteem and sociocultural influences. The social consensus estimates are further discussed in terms of their possible effect on dieting and eating pathology. These results also suggest that the widespread belief in a social consensus associating thinness and romantic success might be inaccurate.

Aggregation of Heterogeneous Beliefs and Asset Pricing Theory: A Mean-Variance Analysis

Within the standard mean-variance framework, this paper provides a procedure to aggregate the heterogeneous beliefs in not only risk preferences and expected payoffs but also variances/covariances into a market consensus belief. Consequently, an asset equilibrium price under heterogeneous beliefs is derived. We show that the market aggregate behavior is in principle a weighted average of heterogeneous individual behaviors. The CAPM-like equilibrium price and return relationships under heterogeneous beliefs are obtained. The impact of diversity of heterogeneous beliefs on the market aggregate risk preference, asset volatility, equilibrium price and optimal demands of investors is examined. As a special case, our result provides a simple explanation for the empirical relation between cross-sectional volatility and expected returns.

Heterogeneous beliefs and asset pricing in discrete time: An analysis of pessimism and doubt

The aim of the paper is to analyze the impact of heterogeneous beliefs in an otherwise standard competitive complete markets discrete time economy. The construction of a consensus belief, as well as a consensus consumer are shown to be valid modulo a predictable aggregation bias, which takes the form of a discount factor. We use our construction of a consensus consumer to investigate the impact of beliefs heterogeneity on the CCAPM and on the expression of the risk free rate. We focus on the pessimism/doubt of the consensus consumer and we study their impact on the equilibrium characteristics (market price of risk, risk free rate). We finally analyze how pessimism and doubt at the aggregate level result from pessimism and doubt at the individual level.

Estimating Firm-specific Long-term Growth Rate and Cost of Capital

We use the residual-income valuation model to simultaneously estimate firm-specific implied long-term growth rate in abnormal earnings and cost of capital by relating earnings-to-price and book-to-market ratios in a linear fashion. This simple framework estimates investors' consensus beliefs with respect to the long-term growth rate of abnormal earnings and the corresponding cost of capital embedded in the stock price. Empirical results show that the growth rate and cost of capital estimates obtained from this model and that of Easton [2004] exhibit desirable properties. Specifically, both cost of capital estimates, controlled for growth, are predictably related to various previously documented firm-specific factors. The cost of capital estimates using this and the Easton [2004] procedure are also positively related to one-year-ahead returns, especially when the change in cost of capital and growth are controlled. Overall, we show the importance of considering return decomposition as well as controlling for growth when assessing the relationship between cost of capital and various risk factors.

Why So Many Bankruptcies and What to Do About It: An Economic Analysis of Consumer Bankruptcy Law and Bankruptcy Reform

Since the inception of the first permanent American bankruptcy law in 1898, the intellectual and political understanding of the bankruptcy process has been anchored in a of the bankruptcy process that views bankruptcies as being driven by household financial distress. For much of the Twentieth Century, this model of bankruptcy accurately explained observed trends in bankruptcy filings. Moreover, the widespread consensus on the traditional was reflected in the enactment of the current Bankruptcy Code in 1978, which rested on the intellectual foundations of the traditional model. To this day, the overwhelming number of leading bankruptcy scholars continues to believe in the descriptive accuracy and normative policy recommendations of the traditional model. Thus, scholars as diverse as Elizabeth Warren and Jay Westbrook, Douglas Baird, and Kenneth Klee, have all expressed strong opposition to the bankruptcy reform legislation. Regardless of whether they draw from a progressive and sociological background (Warren and Westbrook), law & economics background (Baird), or doctrinal background (Klee), scholars have continued to express consensus belief in the traditional and the policy implications that it implies. For most of this period, the traditional has provided both empirically descriptive findings and normatively clear implications. Over the past two decades, however, the traditional has broken down. During a period of unprecedented prosperity and economic stability, personal bankruptcies have soared, raising fundamental questions about the validity of the traditional model. This article argues that there has been an unacknowledged sea-change in the nature of consumer bankruptcy in America and that this requires a new of the consumer bankruptcy process and that this new of consumer bankruptcy also implies the need for certain amendments to the Bankruptcy Code. This article first provides a scientific analysis of the traditional to determine whether these new trends can be accommodated within the traditional model. The is examined in the light of the available evidence and the conclusion is that the traditional is unable to account for the upward surge in bankruptcies over the past twenty-five years. The article then offers a new to explain the anomaly of the rising bankruptcy filings of recent years and examines the available empirical evidence on point. This draws from the school of New Institutional Economics (NIE) and focuses on the institutions, incentives, and transaction costs associated with filing bankruptcy. Although the will require further testing and refinement before it can be said to be definitive, available evidence tends to support the advanced here. The article then turns to the normative conclusions that are suggested by the New Institutional Economics model. Widespread acceptance of the traditional animated the framework of the 1978 Bankruptcy Code and continues to animate the opposition to the current bankruptcy reform movement. The replacement of the traditional with the NIE offered here also has certain normative and policy implications. Most fundamentally, whereas the premises of the traditional are inconsistent with the bankruptcy reform movement, the finding of the NIE justifies many of the key bankruptcy reform efforts of recent years.

THE ENTROPY THEORY OF BOND OPTION PRICING

An informationally efficient price keeps investors as a group in the state of maximum uncertainty about the next price change. The Entropy Pricing Theory (EPT) captures this intuition and suggests that, in informationally efficient markets, perfectly uncertain market beliefs must prevail. When the entropy functional is used to index collective market uncertainty, then the entropy-maximizing consensus beliefs must prevail. The EPT resolves the ambiguity of arbitrage-free valuation in incomplete markets. The EPT produces a new bond option model that is similar to Black–Scholes' with the lognormal distribution replaced by a beta distribution. Unlike alternative models, the beta model is valid for arbitrary term structure dynamics and for arbitrary credit risk of the underlying bonds. Option replication and hedging under the beta model accounts for random changes in the underlying bond price, price volatility and short-term interest rates.

Sampling Strategies for the Collection of Cultural Data: An Extension of Boas's Answer to Galton's Problem

Les recherches en sciences sociales et comportementales doivent definir de facon conventionnelle des criteres de reference afin de pouvoir elaborer une theorie statistique generale. Cependant de nombreuses recherches font appel a des criteres ou facteurs culturels, ce que les anthropologues nomment ethnographie. La demarche ethnographique necessite une enquete aupres d'informateurs qui vont definir de leur propre point de vue les criteres culturels qui formeront ensuite, pour le chercheur, ses donnees ethnographiques. Les AA. posent la question de la methodologie dans le traitement statistique des donnees culturelles, donnees qui ne peuvent echapper a une construction sociale et culturelle toujours mouvante dans le temps et selon les informateurs. A partir d'une enquete sur les relations familiales aux Etats-Unis, les AA. ont applique deux modeles d'interpretation (analyse statistique classique puis analyse culturelle) qui leur ont permis de differencier l'experience de vie d'une part et les donnees culturelles d'autre part.