Economics of Pessimism and Optimism

Beschreibung

This is the first book to investigate the pessimistic and optimistic perceptions of the future and their economic consequences, based on sound mathematical foundations. The book focuses on fundamental uncertainty (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, dynamic asset-pricing models, search, real options, liquidity preferences, and learning. The book also includes characterizations of pessimistic (ε-contaminated) and optimistic (ε-exuberant) behaviors under Knightian uncertainty and the persistence of human pessimism (surprise aversion) and optimism (surprise affinity). These characterizations are shown to be useful in understanding behaviors that were observed during the global financial crisis and its aftermath. This book is highly recommended not only to researchers wanting to understand the mechanism of how pessimism and optimism affects economic phenomena, but also to policy-makers contemplating effective economic policies that delicately hinge upon the mindsets of people in the market.

Is the first economics book to extensively argue pessimism and optimism by focusing on Knightian uncertainty

Discusses Knightian uncertainty rigorously and neatly based on mathematics in a self-contained way

Helps elucidate Knightian uncertainty in depth for researchers and for officials responsible for effective economic policies

Autor*in

Kiyohiko G. Nishimura

Themen in »Economics of Pessimism and Optimism«

Decision theory Knightian uncertainty Optimism Pessimism Uncertainty

Stimmen zu »Economics of Pessimism and Optimism«

This book was awarded the 61st Nikkei Prize for Excellent Books in Economic Science 2018 by The Japan Center for Economic Research

“To summarize, this book, jointly written by the two prominent economists Nishimura and Ozaki, is no doubt a monumental achievement on the economics of ambiguity and uncertainty. It is well organized and mathematically sophisticated. It is expected to be read by two types of readers: highly mathematically trained researchers and general theoretical scholars with less technical orientation. I believe that application-oriented researchers and policy-makers may also benefit from careful reading of such a first-rate work.” (Yasuhiro Sakai, Journal of Economic Psychology, Vol. 72, June, 2019)

“It is especially striking that an economist as immersed in quantitative monetary policy issues as former Deputy Governor of the Bank of Japan Kiyohiko Nishimura would come away from that experience with an enhanced interest in rigorously modeling optimism and pessimism in terms of formal models that extend Bayesian decision theory to incorporate model ambiguity.  Nishimura and his co-author, Hiroyuki Ozaki have created this technically sophisticated and fascinating book that applies state-of-the-art models of model ambiguity to important decision problems in economics.” (Thomas J. Sargent, Professor of Economics, New York University; Nobel Laureate in Economics, 2011)

“The last decades witnessed a significant increase in the interest of economists on the distinction between risk and uncertainty that was first proposed by Frank Knight. The recent financial crisis made this topic even more relevant.  In this remarkable book, Professor Nishimura, an economic theorist who was Deputy Governor of the Bank of Japan during part of this difficult period, and Professor Ozaki, who made several theoretical contributions to dynamic decision making in the presence of risk, combine an exposition of advances in the formalization of “Knightian uncertainty” with several applications to decision problems in economics. An excellent textbook for an advanced graduate course, it also serves as an introduction to the topic for researchers who want to get acquainted with the field.” (José A. Scheinkman, Charles and Lynn Zhang Professor of Economics at Columbia University and Theodore Wells ’29 Professor of Economics Emeritus  at Princeton University)

“This book is a rare example of economics at its best – starting at the very foundations, emphasizing the mathematical and philosophical underpinnings of economic theory, proceeding into micro- and macro-economic theory under uncertainty, and culminating with insights into economic crises. This opus represents the culmination of years of collaboration of two preeminent economists who are unique in their originality, depth, and scope. Given the formidable intellectual edifice of economic theory on the one hand, and phenomena such as the 2007-2008 crisis on the other, it takes no less to address the question, “What went wrong?” and to suggest how economics can be improved as a science, without giving up on the benefit of rigorous analysis.” (Itzahk Gilboa, Professor, Eitan Berglas School of Economics, Tel-Aviv University and Professor of Economics and Decision Sciences, HEC, Paris)

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