Early Resolution Of Uncertainty Research Articles

Non-instrumental information seeking is resistant to acute stress

Previous research has shown that people intrinsically value non-instrumental information, which cannot be used to change the outcome of events, but only provides an early resolution of uncertainty. This is true even for information about rather inconsequential events, such as the outcomes of small lotteries. Here we investigated whether participants’ willingness to pay for non-instrumental information about the outcome of simple coin-flip lotteries with guaranteed winnings was modulated by acute stress. Stress was induced using the Socially Evaluated Cold Pressor Test (SECPT), and information-seeking choices were compared to a warm water control group. Our results neither support the hypothesis that stress decreases information-seeking by directing cognitive resources away from the relevance of the lotteries, nor the opposite hypothesis that stress increases information-seeking by driving anxiety levels up. Instead, we found that despite successful stress induction, as evidenced by increased saliva cortisol levels in the SECPT group, information valuation was remarkably stable. This finding is in line with recent findings that experimentally increased state anxiety did not modulate non-instrumental information seeking. Together, these results suggest that the aversiveness of “not knowing” is a stable cognitive state and not easily modulated by situational context, such as acute stress.

An RBC model with Epstein-Zin (non-expected-utility) recursive preferences: lessons from Bulgaria (1999-2018)


 
 
 We introduce Epstein-Zin (1989, 1991) preferences into a real-business-cycle (RBC) model with government. We calibrate the model economy to Bulgarian data for the period after the currency board regime (1999-2018). We evaluate the quantitative importance of the presence of ”early resolution of uncertainty” motive for the propagation of cyclical fluctuations in Bulgaria. Allowing for Epstein-Zin preferences improves the model performance against data, and in addition this extended setup dominates the standard RBC model framework, e.g., Vasilev (2009).
 
 

A tale of two volatilities: Sectoral uncertainty, growth, and asset prices

What is the impact of higher technological volatility on asset prices and macroeconomic aggregates? I find the answer hinges on its sectoral origin. Volatility that originates from the consumption (investment) sector drops (raises) macroeconomic growth rates and stock prices. Moreover, consumption (investment) sector’s technological volatility has a positive (negative) market price of risk. I show that a quantitative two-sector DSGE model that features monopolistic power for firms and sticky prices, as well as early resolution of uncertainty, can explain the differential impact of sectoral volatilities on real and financial variables. In all, the sectoral decomposition of volatility can overturn the typical negative relation between aggregate volatility and economic activity.

Assessing Valuation Risk: Theory and Empirical Evidence

Does valuation risk induced by stochastic time preferences explain the equity premium puzzle as proposed by Albuquerque et al. (2016)? This explanation of the equity premium has several challenges. First, the valuation risk model implies extreme preference for early resolution of uncertainty and extreme aversion to valuation risk (which becomes infinite as elasticity of intertemporal substitution approaches one). Second, the model has a significant long-run risk component that counterfactually implies that consumption and dividend growth are highly persistent and predictable. Finally, I find no evidence that equity prices predict future risk-free rates as predicted by the baseline valuation risk model.

Essential information: Uncertainty and optimal control of Ebola outbreaks

Early resolution of uncertainty during an epidemic outbreak can lead to rapid and efficient decision making, provided that the uncertainty affects prioritization of actions. The wide range in caseload projections for the 2014 Ebola outbreak caused great concern and debate about the utility of models. By coding and running 37 published Ebola models with five candidate interventions, we found that, despite this large variation in caseload projection, the ranking of management options was relatively consistent. Reducing funeral transmission and reducing community transmission were generally ranked as the two best options. Value of information (VoI) analyses show that caseloads could be reduced by 11% by resolving all model-specific uncertainties, with information about model structure accounting for 82% of this reduction and uncertainty about caseload only accounting for 12%. Our study shows that the uncertainty that is of most interest epidemiologically may not be the same as the uncertainty that is most relevant for management. If the goal is to improve management outcomes, then the focus of study should be to identify and resolve those uncertainties that most hinder the choice of an optimal intervention. Our study further shows that simplifying multiple alternative models into a smaller number of relevant groups (here, with shared structure) could streamline the decision-making process and may allow for a better integration of epidemiological modeling and decision making for policy.

Comment on “Growth uncertainty, generalized disappointment aversion and production-based asset pricing”

A model that jointly explains aggregate asset price and macroeconomic dynamics has been elusive. The literature in macrofinance has evolved significantly since the early efforts of, e.g., Jermann (1998), Tallarini (2000), and Boldrin et al. (2001), but we still have not arrived at an agreed uponworkhorse macro-finance model: fitting onemoment better often leads to fitting other moments worse, calibrations are typically quite aggressive in order to quantitatively account for the data, and parsimony is increasingly giving way to parameter proliferation and ‘black-box’ models where it is harder to fully understand all the mechanisms at play. Relative to this, Liu and Miao (2015) take a more classic, parsimonious approach. They consider a standard real business cycle model with a representative firm and a representative agent, where the technology process is estimated in a straightforward way from the data. While the firm has a standard Cobb–Douglas production function with convex capital adjustment costs, the agent is endowed with generalized disappointment aversion (GDA) preferences and the exogenous technology growth process has timevarying mean and volatility. Introducing GDA preferences into a standard production-based model is the marginal contribution of the paper. Like Epstein and Zin (1989) preferences, GDA preferences allow for a preference for early resolution of uncertainty, and so endogenous long-run consumption risks are priced (see Kaltenbrunner and Lochstoer 2010). Time-varying mean and volatility in the technology process under Epstein–Zin (EZ) utility has been considered in prior literature (e.g., Croce 2014, Malkhozov 2014), as has disappointment aversion (DA) preferences (Campanale et al., 2010). Relative to the latter, which also features first-order risk aversion, GDA preferences can generate endogenously counter-cyclical risk aversion (Routledge and Zin 2010), which typically generates counter-cyclical risk premiums. Time-varying discount rates can in turn help to increase the volatility of the aggregate dividend claim, which is a sticking point in the literature. Liu and Miao have three main results. The first mirrors that of Tallarini (2000) and subsequent studies using EZ or DA preferences: increasing agents' sensitivity to risk (through higher firstand/or second-order risk aversion) has quantitatively

Solving Models with Disappointment Aversion

We solve a dynamic general equilibrium model with generalized disappointment aversion preferences and continuous state endowment dynamics. We apply the framework to the term structure of interest rates and show that the model generates an upward sloping term structure of nominal interest rates, a downward sloping term structure of real interest rates, and that it accounts for the failure of the expectations hypothesis. The key ingredients are disappointment aversion preferences, preference for early resolution of uncertainty, and a parsimonious endowment economy with three state variables: time-varying macroeconomic uncertainty, time-varying expected inflation and inflation uncertainty.

Concavity of the Consumption Function with Recursive Preferences

Carroll and Kimball (1996) show that the consumption function for an agent with time-separable, isoelastic preferences is concave in the presence of income uncertainty. In this paper I show that concavity breaks down if we abandon time-separability. Namely, if an agent maximizing an isoelastic recursive utility has preferences for early resolution of uncertainty, there always exists a distribution of income risk such that consumption function is not concave in wealth. I also derive sufficient conditions guaranteeing that the consumption function is concave if the agent has preferences for late resolution of uncertainty.

R-Square and Market Efficiency

This paper addresses the debate about R-square as an indicator of information quality: Does low R-square indicate early resolution of uncertainty through the arrival of firm-specific information, or does it indicate a high level of uncertainty that remains unresolved? Tests based on the post-earnings-announcement drift, V/P, accruals, and net operating assets anomalies all reject the view that low R-square indicates a high quality information environment (early resolution of uncertainty). Low R-square firms have lower future earnings response coefficient, indicating that their current stock price incorporates a smaller amount of future earnings news, and thus more uncertainty about future earnings news remains unresolved. Furthermore, low R-square firms have worse information environment as measured by earnings quality, earnings persistence, and earnings predictability, and have higher probability of distress.

Optimal consumption and the timing of the resolution of uncertainty

As is well-known, consumers want to accumulate precautionary savings in the face of income risks when their marginal utility is convex (prudence). In this paper, we explore the effect of the timing of the resolution of income uncertainty on savings. An agent faces uncertainty about his income at date t+2. What is the effect of being informed that the uncertainty will be resolved at date t+1 on the consumption at date t? We show that the effect is positive, if and only if, marginal utility is convex (prudence), when either the risk free rate is equal to the rate of pure preference for the present, or when the utility function is HARA. The intuition is that an early resolution of uncertainty allows for time-diversifying the risk. It therefore plays a role similar to a reduction of the income risk, whose effect on savings is negative under prudence.

Temporal resolution of uncertainty in risky choices

Early resolution of uncertainty (information) does certainly yield a planning advantage, and yet, many participants prefer late resolution. This paper addresses a solution to this puzzle at the level of formal cost-benefit theories by considering the early uncertainty resolution not only in terms of benefit associated with it, but also in terms of the cost that often accompanies the early resolution. This study investigated the impact of amount, outcome probability and time delay on ratings of preference strength towards late resolution. The main findings in this study are: (i) the preference strength towards late resolution of uncertainty is dependent on the remoteness of the timing of consumption, (ii) the preference strength towards late resolution is a decreasing function of outcome probability, and finally (iii) the preference strength increases in the direction of late resolution as the amount shifts from large to small.

Schur convexity, quasi-convexity and preference for early resolution of uncertainty

This paper deals with decision makers who choose among information systems. It shows that the properties of Schur convexity and of quasi-convexity are equivalent, even when general preferences are considered. Since Schur convexity is closely related to having a willingness to accept information and since quasi-convexity is closely related to having a preference for early resolution of the uncertainty about which information system prevails, then it follows that the equivalence implies that decision makers prefer more information to less if, and only if, they prefer early resolution of uncertainty to later resolution.

The effect of early resolution of uncertainty on the valuation of assets: A dichotomy into market and non-market information

We reconsider how the temporal resolution of uncertainty about the future payoffs from capital assets affects the initial valuation of these assets. Our results regarding valuation indicate that, in an intertemporal CAPM framework, the early resolution of market uncertainty leads to an increase in the value of the market portfolio. The values of individual assets change in direct proportion to their betas. We reconcile the differing conclusions of Ross (1989) and Epstein and Turnbull (1980) regarding the early resolution of what they term “idiosyncratic” and “asset specific” information respectively.

Global warming uncertainties and the value of information: an analysis using CETA

In this paper, we investigate the sensitivity of optimal carbon control strategies to parameters of the Carbon Emissions Trajectory Assessment (CETA) Model, and we use CETA in a simple decision tree framework to estimate the value of information about global warming uncertainties. We find that if an optimal control policy is used under uncertainty, the eventual resolution of uncertainty has high value relative to current research budgets, and resolving uncertainty about the costs of warming is nearly as important as resolving uncertainty about the extent of warming. In addition, we find that there is not a high premium on immediate resolution of uncertainty, if resolution would otherwise occur within, say, twenty years; this implies that time is available to plan and execute a carefully designed research program. On the other hand, we find that if the real world political process would result in a suboptimal control policy being chosen under uncertainty, and this choice could be prevented by early resolution of uncertainty, the benefit of early resolution may be as much as three orders of magnitude greater.