Economics of pessimism and optimism: Theory of Knightian uncertainty and its applications

Kiyohiko G. Nishimura, Hiroyuki Ozaki

Research output: Book/ReportBook

2 Citations (Scopus)

Abstract

This is the first book to investigate individual's pessimistic and optimistic prospects for the future and their economic consequences based on sound mathematical foundations. The book focuses on fundamental uncertainty called Knightian uncertainty, where the probability distribution governing uncertainty is unknown, and it provides the reader with methods to formulate how pessimism and optimism act in an economy in a strict and unified way. After presenting decision-theoretic foundations for prudent behaviors under Knightian uncertainty, the book applies these ideas to economic models that include portfolio inertia, indeterminacy of equilibria in the Arrow-Debreu economy and in a stochastic overlapping-generations economy, learning, dynamic asset-pricing models, search, real options, and liquidity preferences. The book then proceeds to characterizations of pessimistic (e-contaminated) and optimistic (e-exuberant) behaviors under Knightian uncertainty and people's inherent pessimism (surprise aversion) and optimism (surprise loving). Those characterizations are shown to be useful in understanding several observed behaviors in the global financial crisis and in its aftermath. The book is highly recommended not only to researchers who wish to understand the mechanism of how pessimism and optimism affect economic phenomena, but also to policy makers contemplating effective economic policies whose success delicately hinges upon people's mindsets in the market.

Original languageEnglish
PublisherSpringer Japan
Number of pages326
ISBN (Electronic)9784431559030
ISBN (Print)9784431559016
DOIs
Publication statusPublished - 2017 Nov 13

Fingerprint

Optimism
Pessimism
Economics
Knightian uncertainty
Surprise
Uncertainty
Inertia
Global financial crisis
Learning dynamics
Overlapping generations
Probability distribution
Asset pricing models
Liquidity preference
Economic consequences
Mindset
Politicians
Real options
Indeterminacy of equilibrium
Economic policy

ASJC Scopus subject areas

  • Economics, Econometrics and Finance(all)
  • Business, Management and Accounting(all)

Cite this

Economics of pessimism and optimism : Theory of Knightian uncertainty and its applications. / Nishimura, Kiyohiko G.; Ozaki, Hiroyuki.

Springer Japan, 2017. 326 p.

Research output: Book/ReportBook

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