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Divergence of Opinion in Complete Markets: A Note
Author(s) -
VARIAN HAL R.
Publication year - 1985
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1985.tb04951.x
Subject(s) - asset (computer security) , economics , arrow , consumption (sociology) , aggregate (composite) , econometrics , complete market , general equilibrium theory , divergence (linguistics) , dispersion (optics) , mathematical economics , microeconomics , financial economics , computer science , philosophy , linguistics , materials science , physics , computer security , optics , composite material , programming language , aesthetics
We consider an Arrow‐Debreu model with agents who have different subjective probabilities. In general, asset prices will depend only on aggregate consumption and the distribution of subjective probabilities in each state of nature. If all agents have identical preferences then an asset with “more dispersed” subjective probabilities will have a lower price than an asset with less dispersed subjective probabilities if risk aversion does not decline too rapidly. It seems that this condition is likely to be met in practice, so that increased dispersion of beliefs will generally be associated with reduced asset prices in a given Arrow‐Debreu equilibrium.