Heterogeneous Beliefs Research Articles

Optimal Reinsurance Arrangement Under Heterogeneous Beliefs: A Unified Method with Piecewise Modification

Optimal Reinsurance Arrangement Under Heterogeneous Beliefs: A Unified Method with Piecewise Modification

Consistent Egalitarianism or Heterogeneous Belief Patterns? Gender Ideologies in Contemporary East and West Germany

Abstract Studying gender ideologies is crucial for understanding the work and family related behaviors of women and men. This paper analyzes the gender ideologies of respondents living in East and West Germany, and whether these belief patterns differ by socio-demographic characteristics. To this end, latent class analysis is applied to eight gender role items from the FReDA 2021 survey. The results show the presence of a consistent and widespread egalitarian gender ideology in both regions, as well as a less prevalent traditional one in the West. Additionally, heterogeneous gender ideologies are to be found with egalitarian essentialism present in both regions, and intensive parenting only in the West. Respondents with a lower level of education and males have higher chances of holding non-egalitarian ideologies. The findings align with the literature on persisting East-West differences in gender ideology, and with research on the diversification of gender ideology.

Heterogeneous beliefs and short selling taxes: A note

Short selling is widespread in financial markets but regulators can ban short positions. The intermediate policy of taxing short sellers has been studied in an asset pricing model with evolutionary competition of two belief types (Anufriev and Tuinstra, 2013). We extend this approach to an arbitrary number of belief types H, giving 3H−2H cases to check each period in the worst-case scenario. We provide analytic expressions for asset prices along with conditions on beliefs (optimism) that determine which types take long, short or zero asset positions at the market-clearing price. We use these results to construct a fast solution algorithm (quadratic in H) which can solve models with hundreds or thousands of types in a matter of seconds. A numerical example with a short-selling tax and many heterogeneous beliefs in evolutionary competition shows that price dynamics can differ substantially relative to the benchmark of few types.

Meritocratic beliefs in the United States, Finland, and China: A multidimensional approach using latent class analysis.

This study employs latent class analysis (LCA) as a novel methodology to investigate the multidimensional nature of meritocratic beliefs, addressing the limitations of traditional unidimensional approaches. Using data from the International Social Survey Program 2009 for the United States, Finland, and China, this study demonstrates several advantages of this multidimensional approach. First, LCA effectively identifies dual consciousness, where individuals simultaneously endorse meritocratic and structuralist explanations of social stratification. The analysis reveals three distinct narratives explaining social stratification: purely meritocratic beliefs, predominantly meritocratic beliefs, and dual consciousness. While all three subtypes consider merits highly important, they differ in their perceived importance of structural factors. Second, LCA facilitates cross-national comparisons, unveiling qualitative typological variations in meritocratic beliefs across countries. Unique country-specific subtypes or patterns emerge: Finland exhibits purely meritocratic beliefs, the United States shows predominantly meritocratic beliefs, and China demonstrates a dominance of dual consciousness. Although dual consciousness exists in all three countries, its prevalence varies significantly-dominant in China, moderate in the United States, and least in Finland. Third, this study reveals that the effect of education on meritocratic beliefs varies across the three countries. Education strengthens individual meritocratic beliefs in the United States, weakens them in Finland, and shows no significant effect in China. These findings highlight both within-country and across-country heterogeneity of meritocratic beliefs, underscoring the importance of amultidimensional approach.

Momentum mechanisms under heterogeneous beliefs

We establish a continuous-time heterogeneous beliefs model to discuss the mechanisms of Momentum and Reversal. Price learning, information transmission and extrapolative expectation are incorporated into a unified framework for the Momentum and Reversal. The calibration results from SP500 show that the presence of Extrapolators and Information-driven Traders are important influences of Momentum and Reversal in all phases. We also find that momentum and reversal become significantly stronger as belief weights approach true belief weights.

Winning Seats: Contingency Selling in Markets with Limited Capacity and Diverse Preferences

This paper examines an emerging pricing model, contingency selling, for markets where the product is sold in advance with attribute uncertainty and capacity constraint. A typical example is tournament ticket sales for sports events where it is uncertain whether a particular team will appear in the game. The model enables the firm to sell tickets in a contingent fashion, i.e., some tickets will be valid only if a certain team gets into the game. When consumers (fans) have sufficiently different preferences for different products (games with different teams), selling these “contingent tickets” better matches the price with the willingness-to-pay of particular consumer segments (fans of specific teams). Exploiting state-based price discrimination and belief heterogeneity, contingent tickets generate a higher margin per seat than the traditional way of selling general tickets, especially when there are supply constraints. We further show that contingency selling continues to be advantageous in the presence of secondary markets where consumers purchase tickets in advance but can trade tickets once they know which team will be in the game. We extend our model to examine the impacts of consumer optimism bias and fan base asymmetry. Finally, we compare contingency selling with alternative selling mechanisms to demonstrate the robustness of our results and illustrate the situations where this new selling model is more (or less) advantageous.

Investor attention and corporate financialization: Evidence from internet search volume

This paper investigates the relationship between investor attention and corporate financialization from a behavioral finance perspective. We use Internet search volume as a proxy for investor attention and find that investor attention is significantly and positively related to corporate financialization using a sample of listed firms in China over the period 2011–2022, and that this relationship is more pronounced in firms with higher levels of managerial myopia. A series of robustness tests still support our baseline findings, such as considering endogeneity issues, substituting core variables, and changing the model setting. We further discuss the mechanism of influence using two-stage regressions and find that investor attention promotes corporate financialization by increasing investor sentiment as well as heterogeneous beliefs. Finally, we perform a series of heterogeneity tests and find that the positive relationship between investor attention and corporate financialization is more pronounced among firms with higher information uncertainty, small firms, firms within monopolistic industries, and firms within high-tech industries. However, the relationship is not significantly different among firms with different levels of institutional ownership. This study provides new evidence for understanding investors' behavioral biases and how investor attention affects corporate investment strategies.

Not the average farmer: Heterogeneity in Dutch arable farmers’ intentions to reduce pesticide use

Ambitious environmental policies and regulations in Europe aim to reduce pesticide use, yet their implementation faces significant obstacles. Effective strategies that gain support within the farming community require a deeper understanding of the underlying intentions, considering that farmers are a heterogeneous group with diverse beliefs related to socio-demographic characteristics. Using an existing dataset with theory of planned behaviour data from 359 Dutch arable farmers (Bakker et al., 2021), we examined the heterogeneity in intentions and beliefs regarding pesticide reduction. Expanding the analysis with quantile regression models, we show that the influence of attitude becomes increasingly important as farmers' aspirations to reduce pesticide use grow. Additionally, we observed a small positive effect of injunctive norms at the 25th quantile and a small negative effect at the 75th quantile of intention. These findings indicate that the relative impact of these constructs varies across the intention distribution, emphasising the need for more nuanced quantitative analyses of heterogeneity in TPB studies. Using moderation models, we observed variations in the relative impact of attitude, injunctive and descriptive norms on intention across different segments of the farming community, particularly concerning age, educational level, and farm income dependencies. Younger, higher-educated farmers, and those less reliant on farm income demonstrated greater openness towards reducing pesticide usage and adopting alternative crop protection practices. These findings suggest that different farmer segments may respond differently to interventions and incentives. Policymakers can leverage this knowledge to develop more nuanced and targeted strategies that promote pesticide reduction while aligning with the diverse motivations and beliefs present among farmers.

To Catch a Stag: Identifying payoff- and risk-dominance effects in coordination games

Five decades after Harsanyi and Selten's seminal work on equilibrium selection, we remain unable to predict the outcomes of real-life coordination even in simple cases. One reason is that experiments have struggled to quantify the effects of payoff- and risk-dominance and to separate them from context factors like feedback, repetition, and complexity. This experiment is the first to demonstrate that both payoff- and risk-dominance significantly and independently impact coordination decision-making. Three innovations characterize the design: First, payoff- and risk-dominance are disentangled using orthogonal measures of strategic incentives and welfare externalities. Second, a no-feedback, choice-list task format minimizes deviations from one-shot incentives. Third, beliefs about others' behavior are elicited. Strikingly, heterogeneous beliefs across the population rationalize not only reactions to risk dominance but also most reactions to payoff dominance. In addition, deviations from expected-value maximization in specific games suggest a minor role for social projection or other-regarding preferences.

Endogenous Aggregate Beliefs: Equity Trading under Heterogeneity in Ambiguity Aversion

We build a simple and tractable model of consumer heterogeneity in ambiguity aversion and use it to illustrate how asymmetric beliefs in the asset markets affect the dynamics of asset pricing, portfolio allocation, and the wealth distribution. The model is an otherwise canonical exchange-economy setting with two aggregate states of nature and two assets. The key focus is on how asset prices, when subjected to ambiguity, behave very differently in the short run than in the long run. In the short run, heterogeneity plays an important role. In the long run, belief heterogeneity persists, but the wealth distribution has evolved so that only the least ambiguity-averse investors matter for prices. As part of the short-run dynamics, the model can generate endogenous aggregate movements in non-participation—a drastic form of trading less—in response to ambiguity, with strong depressing effects on asset prices.

Risk sharing under heterogeneous beliefs without convexity

We consider the problem of finding (Pareto-)optimal allocations of risk among finitely many agents. The associated individual risk measures are law-invariant, but with respect to agent-dependent and potentially heterogeneous reference probability measures. Moreover, we assume that the individual risk assessments are consistent with the respective second-order stochastic dominance relations, but remain agnostic about their convexity. A simple sufficient condition for the existence of Pareto optima is provided. The proof combines local comonotonic improvement with a Dieudonné-type argument, which also establishes a link of the optimal allocation problem to the realm of “collapse to the mean” results.

Asset Pricing with Costly Short Sales

We study a dynamic general equilibrium model with costly-to-short stocks and heterogeneous beliefs. Costly short sales drive a wedge between the valuation of assets that promise identical cash flows but that are subject to different trading arrangements. In particular, we show that the price of an asset is given by the risk-adjusted present value of its future cash flows, which include both dividends and an endogenous lending yield that we characterize explicitly. This valuation formula implies that stocks with low and high shorting costs should offer similar risk-return trade-off once returns are appropriately adjusted for lending revenues and thus, sheds light on recent empirical findings about the explanatory power of shorting costs in the cross-section of returns. This paper was accepted by Lukas Schmid, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.01887 .

Overconfidence and ethical contracts

Introducing heterogeneous beliefs into a contracting framework allows for considering ethical behavior. Optimal contracts with heterogeneous beliefs need to balance the standard effects of risk aversion and incentives for effort with the desire for exploitation. We study the situation where the principal additionally takes an explicit ethical stance: The agent must not be worse off from accepting the contract than the agent’s outside option according to the principal’s beliefs. In this framework, heterogeneous beliefs still matter, and we fully characterize the optimal contract with an overconfident agent. The agent is strictly better off with an ethical principal. The ethical principal may be better off with an overconfident agent, leading to Pareto improvements in welfare.

Nominal exchange rates and heterogeneous beliefs

We propose a two-country model with heterogeneous beliefs to understand dynamics of nominal exchange rate. Facing a shock to monetary policy, disagreement between domestic and foreign investors shifts the relative wealth of investors – an essential part of the stochastic discount factor in our model – which then moves the foreign exchange rate. Calibrated to U.S. and U.K. data, our model reveals that dispersion in beliefs predicts the future spot exchange rate, associates with the cross-section of currency risk premia, and comoves with the time-varying volatility in currency returns. Furthermore, our model suggests that domestic investors would hold fewer foreign currency-denominated bonds in countries with greater disagreements on monetary policy.

Optimal Contracts for Time-Inconsistent Consumers with Heterogeneous Beliefs

In many markets (e.g., cell phones, video games), firms offer menus of contracts that include some tariffs charging per-use prices above marginal cost and others below marginal cost. We term this puzzling phenomenon as two-sided deviations from marginal cost pricing and present a potential explanation based on two well-recognized consumer characteristics. The first one is that consumers’ actual consumptions may depart systematically from their initial plans (i.e., time-inconsistent preferences). In addition, consumers can be either sophisticated or naive in their beliefs about their time inconsistency (i.e., heterogenous beliefs). We characterize properties of the optimal contracts for a firm to screen the time-inconsistent consumers with heterogeneous beliefs. We articulate the conditions under which the optimal menu may account for two-sided deviations from marginal cost pricing. We also show that, contrary to intuition, a higher degree of time inconsistency may reduce firm profit and increase social welfare. Meanwhile, reducing consumer naivete may harm the society. Moreover, we confirm that our main results are robust to the presence of time-consistent consumers. This paper was accepted by Dmitri Kuksov, marketing. Funding: This work was supported by the Hunan Provincial Natural Science Foundation of China [Grant 2022JJ40102]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.02653 .

Optimal investment and exit decision of venture capitals with multiple heterogeneous Beliefs

Generally, traders hold different beliefs about the same project in venture capital activities. We propose a two-stage decision model with multiple heterogeneous beliefs using real options game theory. Based on this model, we analyse the optimal timing and amount of invested capital for venture capital in stage 1 (investing) and stage 2 (exiting). The results show that different beliefs decrease the optimal amount of invested capital but have little influence on the optimal investment timing, which accounts for the “agree to disagree” phenomenon. This negative effect can be offset by the learning process but can also be exacerbated by the differences in required returns.

Heterogeneous beliefs with information processing capacity constraints and asset pricing in a monetary economy

This paper proposes a monetary model to explore the influences of heterogeneous beliefs and information processing capacity constraints on the dynamics of asset prices. The capacity constraints not only influence the estimations of the capacity constrained investor, but also generate persistent disagreements among the investors. The model implies that reducing the levels of capacity constraints can alleviate the influences of heterogeneous beliefs and helps to stabilize financial markets. The model also reveals that introducing heterogeneous beliefs about both real and nominal sectors not only leads the stock with low monetary policy exposure to have significantly higher average return than the stock with high monetary policy exposure, but also can explain the mixed results about the relationship between the volatility and the risk premium of the aggregate stock market.

Adapting to climate change accounting for individual beliefs

As the climate changes, efficient climate policy requires a better understanding of how individuals adapt. Despite extensive research on various climate adaptation frictions, including financial and technological constraints, models of adaptive decision-making assume that agents have perfect information and accurate beliefs about climate. Combining rural household data in Bangladesh with a meteorological measure of dryness, this paper studies the role of individual drought beliefs and their accuracy in irrigation decisions as a key adaptive margin. In a theoretical model, I introduce a behavioral friction to document how heterogeneous beliefs differentially influence responsiveness to the same meteorological signal in dryness. The empirical analysis reveals an asymmetric response to dry shocks in irrigation conditional on the accuracy of prior beliefs. A counterfactual analysis shows lower technology adoption levels and higher monetary losses when beliefs are inaccurate.

Fairness and limited information: Are people Bayesian meritocrats?

This paper studies how limited information about the source of inequality affects inequality acceptance. We show theoretically that non-Bayesian belief updating can be as important as heterogeneity in fairness views for understanding disagreements about inequality: in a large class of economic environments, signal-neglecting meritocrats consider the egalitarian distribution to be fair, while base-rate neglecting meritocrats consider the libertarian distribution to be fair. We provide experimental evidence showing significant heterogeneity in the updating behavior of meritocratic spectators, and, as a result, polarization in inequality acceptance. Finally, we show that the distributive decisions of third-party spectators are best explained by a structural model that allows for heterogeneity both in fairness views and belief updating, with heterogeneity in belief updating causing twice as much polarization in inequality acceptance as heterogeneity in fairness views. The findings contribute to better understanding of the foundations of inequality acceptance in society.

Heterogeneous beliefs with preference interdependence and asset pricing

We study the equilibrium implications of heterogeneous beliefs and preference interdependence on the dynamics of asset prices and the resulting market behaviors. For the purpose of capturing the preference interdependence, we allow each investor’s utility not only depends their own terminal wealth, but also depends on the other one’s. We show that the preference interdependence generates a form of “herding behavior”, that induces the investors’ beliefs to coverage with each other. Therefore, the degree of the influences of the heterogeneous beliefs is attenuated. We also present that the heterogeneous beliefs impose negative effects on the prices of stocks and call options, whereas generate positive effects on the prices of put options. Due to the attenuation effect, the preference interdependence can have a strong promoting effect on the prices of stocks and call options and a strong depressing effect on the prices of put options. Furthermore, the attenuation effect also imposes a strong depressing effect on the volatilities of stocks even there exists high degree of heterogeneous beliefs among the investors. Finally, we present that both the heterogeneous beliefs and the preference interdependence can result in co-movement between stock and option markets.