Anxiety and pro-cyclical risk taking with Bayesian agents

Thomas Eisenbach and Martin Schmalz

No 711, Staff Reports from Federal Reserve Bank of New York

Abstract: We provide a model that can explain empirically relevant variations in confidence and risk taking by combining horizon-dependent risk aversion (?anxiety?) and selective memory in a Bayesian intrapersonal game. In the time series, overconfidence is more prevalent when actual risk levels are high, while underconfidence occurs when risks are low. In the cross section, more anxious agents are more prone to biased confidence and their beliefs fluctuate more. This systematic variation in confidence levels can lead to objectively excessive risk taking by ?insiders? with the potential to amplify boom-bust cycles.

Keywords: overconfidence; dynamic inconsistency; biases; deception; risk taking (search for similar items in EconPapers)
JEL-codes: C72 D03 D81 D83 G02 (search for similar items in EconPapers)
Date: 2015-02-01
New Economics Papers: this item is included in nep-exp, nep-mic and nep-upt
Note: Previous title: "Confidence Cycles" Title of the first revision: "Anxiety, overconfidence, and excessive risk-taking."
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/rese ... orts/sr711.pdf?la=en Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:711

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().