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Uncertainty, Expectations, and Financial InstabilityReviving Allais's Lost Theory of Psychological Time$
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Eric Barthalon

Print publication date: 2014

Print ISBN-13: 9780231166287

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231166287.001.0001

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Perceived Returns and the Modeling of Financial Behavior

Perceived Returns and the Modeling of Financial Behavior

(p.183) Chapter Nine Perceived Returns and the Modeling of Financial Behavior
Uncertainty, Expectations, and Financial Instability

Eric Barthalon

Columbia University Press

This chapter describes a few simple models that explain financial behavior by the perceived returns on financial assets and thereby provide evidence of positive feedback from past returns to the demand for risky assets. These models bring to light nonlinear relationships between perceived returns and observed investors' behavior. The chapter presents a few examples that are particularly relevant with respect to the dynamics of financial instability. The discussion begins with some empirical evidence of a positive feedback from past equity returns into the demand for equities. As this demand exhibits a nonlinear pattern that is similar to the one found by Maurice Allais in his HRL formulation of the supply of money, the findings are compared with those of Allais. The chapter concludes with a discussion of the policy implications of positive feedback.

Keywords:   financial behavior, financial assets, risky assets, investors' behavior, financial instability, perceived returns, equities, Maurice Allais, HRL formulation, positive feedback

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