- Title Pages
- Title Pages
- List of Tables
- List of Figures
- Preface
- Acknowledgments
- Acknowledgments
- Introduction
- Glossary of Mathematical Symbols in Order of Appearance
-
Chapter One Expectations Before the Rational Expectations Revolution -
Chapter Two Rational Expectations Are Endogenous to and Abide by “the” Model -
Part Two Allais’s Theory of “Expectations” Under Uncertainty -
Chapter Three Macrofoundations of Monetary Dynamics -
Chapter Four Microfoundations of Monetary Dynamics -
Chapter Five The Fundamental Equation of Monetary Dynamics -
Chapter Six Joint Testing of the HRL Formulation of the Demand for Money and of the Fundamental Equation of Monetary Dynamics -
Chapter Seven Allais’s HRL Formulation -
Chapter Eight The HRL Formulation and Nominal Interest Rates -
Chapter Nine Perceived Returns and the Modeling of Financial Behavior -
Chapter Ten Downside Potential Under Risk -
Chapter Eleven Downside Potential Under Uncertainty -
Chapter Twelve Conclusion -
Appendix A How to Compute Zn and zn -
Appendix B Nominal Interest Rates and the Perceived Rate of Nominal Growth -
Appendix C Proofs -
Appendix D Comparison Between the Kalman Filter and Allais’s HRL Algorithm -
Appendix E A Note on the Theory of Intertemporal Choice -
Appendix F Allais’s Cardinal Utility Function - Bibliography
- Index
Downside Potential Under Uncertainty
Downside Potential Under Uncertainty
The Perceived Risk of Loss
- Chapter:
- (p.241) Chapter Eleven Downside Potential Under Uncertainty
- Source:
- Uncertainty, Expectations, and Financial Instability
- Author(s):
Eric Barthalon
- Publisher:
- Columbia University Press
This chapter examines how time can be introduced in the assessment of downside risk, that is, how Maurice Allais's paradox and his theory of psychological time can be combined into the perceived risk of loss. It illustrates the relevance of the perceived risk of loss by analyzing the pricing of some financial instruments. It considers whether the perceived risk of loss can explain the pricing of some financial assets and plays a role in the inception of financial bubbles. It also asks whether institutional or demographic factors might justify the claim made by the HRL formulation that collective human psychology is on average constant through time and space. It suggests that major bubbles tend to be heralded by a fall in the perceived risk of loss to unprecedented levels. The chapter concludes by discussing potential connections between the perceived risk of loss and moral hazard.
Keywords: downside risk, Maurice Allais, psychological time, perceived risk of loss, financial instruments, financial assets, financial bubbles, HRL formulation, human psychology, moral hazard
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- Title Pages
- Title Pages
- List of Tables
- List of Figures
- Preface
- Acknowledgments
- Acknowledgments
- Introduction
- Glossary of Mathematical Symbols in Order of Appearance
-
Chapter One Expectations Before the Rational Expectations Revolution -
Chapter Two Rational Expectations Are Endogenous to and Abide by “the” Model -
Part Two Allais’s Theory of “Expectations” Under Uncertainty -
Chapter Three Macrofoundations of Monetary Dynamics -
Chapter Four Microfoundations of Monetary Dynamics -
Chapter Five The Fundamental Equation of Monetary Dynamics -
Chapter Six Joint Testing of the HRL Formulation of the Demand for Money and of the Fundamental Equation of Monetary Dynamics -
Chapter Seven Allais’s HRL Formulation -
Chapter Eight The HRL Formulation and Nominal Interest Rates -
Chapter Nine Perceived Returns and the Modeling of Financial Behavior -
Chapter Ten Downside Potential Under Risk -
Chapter Eleven Downside Potential Under Uncertainty -
Chapter Twelve Conclusion -
Appendix A How to Compute Zn and zn -
Appendix B Nominal Interest Rates and the Perceived Rate of Nominal Growth -
Appendix C Proofs -
Appendix D Comparison Between the Kalman Filter and Allais’s HRL Algorithm -
Appendix E A Note on the Theory of Intertemporal Choice -
Appendix F Allais’s Cardinal Utility Function - Bibliography
- Index
