A Welfare Criterion for Models with Distorted Beliefs

Markus K. Brunnermeier; Alp Simsek; Wei Xiong

doi:10.3386/w20691

A Welfare Criterion for Models with Distorted Beliefs

Markus K. Brunnermeier, Alp Simsek & Wei Xiong

Working Paper 20691

DOI 10.3386/w20691

Issue Date November 2014

Revision Date February 2015

This paper proposes a welfare criterion for economies in which agents have heterogeneously distorted beliefs. Instead of taking a stand on whose belief is correct, our criterion asserts that an allocation is belief-neutral efficient (inefficient) if it is efficient (inefficient) under any convex combination of agents' beliefs. While this criterion gives an incomplete ranking of social allocations, it can identify positive- and negative-sum speculation driven by conflicting beliefs in a broad range of economic environments.

We thank John Geanakoplos, Lars Hansen, David Hirshleifer, Leonid Kogan, Carsten Nielsen, Stephen Morris, Wolfgang Pesendorfer, Larry Samuelson, Martin Schneider, Chris Sims, Tomasz Strzalecki, Dimitri Vayanos, Glen Weyl, and seminar participants at London Business School, Princeton University, University of British Columbia, University of Cambridge, University of Chicago, 2012 Behavioral Finance Conference in Amsterdam, 2012 NBER Meeting on Capital Markets and the Economy, 2013 Econometric Society Meetings, 2012 NBER Behavioral Economics Meeting, 2012 CITE conference, 2012 SITE Conference on Psychology and Economics, 8th Annual Cowles Foundation Conference on General Equilibrium and Its Applications, and the 2nd Miami Behavioral Finance Conference for helpful discussion and comments. We also thank Zhenyu Gao, Ji Huang, and Alejandro Van der Ghote for able research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.

Markus K. Brunnermeier
Disclosures

2010-2013/01

As a guiding principle I follow the NBER Research Disclosure Policy: http://www.nber.org/researchdisclosurepolicy.html

To date, no single relationship (other than my salary form Princeton University) has accounted for more than 10 percent of my aggregate annual income in that year.

Significant Remunerated Activities:

Speaking engagements and lectures

Stifterverband der Deutschen Wirtschaft, 2012

Ambrosetti – The European House, 2011

Center for Investor Education, 2011

Wim Duisenberg School of Finance, 2010

Handelsbanken, 2010

Deutsche Bank, 2010

FEBRABAN, Brazil, 2009

Central banks

ECB, ESRB, Bank of England, National Bank of Austria, Swiss National Bank, Bank of Japan, Federal Reserve, New York Fed, Bank of Canada, Bank of Chile, Bank of Korea

International financial institution

IMF

Academic Organizations

Swiss Finance Institute, 2012-

No expert testimony for law suits or paid consulting work for private cooperation to date.

Research Grants:

Sloan Foundation 2011-12

Guggenheim Fellowship, 2010-11

University of Chicago, T.W. Schultz Prize and Lecture, 2010

INQUIRE Europe, Research Grant

Visiting Scholar and Other:

Milton Friedman Institute, visiting scholar 2011

American Economic Review, Journal of Finance, Associated Editorship

Significant Non-Compensated Activities:

American Finance Association: Director

Financial Advisory Roundtable and Monetary Policy Panel, Federal Reserve Bank of New York, 2006 – present

INET Advisory Board Member, 2009 – present

2010-2013/01
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Markus K. Brunnermeier, Alp Simsek, and Wei Xiong, "A Welfare Criterion for Models with Distorted Beliefs," NBER Working Paper 20691 (2014), https://doi.org/10.3386/w20691.

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- November 18, 2014

A Welfare Criterion for Models with Distorted Beliefs

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