Can fuzzy decision -making be another piece of the puzzle?
Item
-
Title
-
Can fuzzy decision -making be another piece of the puzzle?
-
Identifier
-
AAI3325419
-
identifier
-
3325419
-
Creator
-
Balagyozyan, Aram.
-
Contributor
-
Adviser: Christos Giannikos
-
Date
-
2008
-
Language
-
English
-
Publisher
-
City University of New York.
-
Subject
-
Economics, Finance
-
Abstract
-
This dissertation examines whether the widespread human tendency of forming fuzzy subjective beliefs can be accountable for two prominent theoretical conundrums: the excess consumption growth puzzle and the equity premium puzzle.;The first chapter of this dissertation is devoted to the excess consumption growth puzzle. Angus Deaton discovered that there was a prolonged period during post-World War II U.S. history when the aggregate consumption continued growing, while the expost real interest rate remained negative. This troubling coexistence is not consistent with the Euler equation derived from a family of conventional intertemporal consumption models and was coined by Deaton as "the excess of consumption growth puzzle." This chapter establishes that under stochastic wealth constraint neither precautionary motives nor subjective pessimism and doubt can entirely resolve the puzzle. Using a simple two-period life-cycle consumption model, we demonstrate that, when the representative consumer forms fuzzy beliefs, then the resulting optimal saving behavior is consistent with the excess consumption growth. Hence, the explicit treatment of fuzzy decision-making in intertemporal consumption models can go a long way in settling the puzzle of excess consumption growth.;In the second chapter we examine whether the equity premium puzzle can be uncovered if the representative agent is endowed with a mechanism of combining robust forecasts with subjective fuzzy beliefs about forthcoming consumption growth. The puzzle is introduced by Mehra and Prescott, who show that the U.S. historical average excess return on risky equity over that of the riskless bonds is much higher than what could be explained by the family of conventional intertemporal stochastic consumption models. We use an infinite-horizon dynamic model to demonstrate in general equilibrium settings that, when the growth rate of consumption in every random state of the world is perceived by a pessimistic representative agent as a fuzzy rather than crisp magnitude, then the resulting Euler equation can successfully be calibrated to account for on average low risk-free rates as well as large equity premiums. We conclude that introduction of fuzzy uncertainty as an additional layer of uncertainty in intertemporal representative agent models can be very fruitful in settling the equity premium puzzle.
-
Type
-
dissertation
-
Source
-
PQT Legacy CUNY.xlsx
-
degree
-
Ph.D.
