Fragile beliefs and the price of uncertainty
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Open Access
- 1 January 2010
- journal article
- Published by The Econometric Society in Quantitative Economics
- Vol. 1 (1) , 129-162
- https://doi.org/10.3982/qe9
Abstract
A representative consumer uses Bayes' law to learn about parameters and to construct probabilities with which to perform ongoing model averaging. The arrival of signals induces the consumer to alter his posterior distribution over parameters and models. The consumer copes with specification doubts by slanting probabilities pessimistically. One of his models puts long-run risks in consumption growth. The pessimistic probabilities slant toward this model and contribute a counter-cyclical and signal-history-dependent component to prices of risk.Keywords
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