Optimal Beliefs in the Long Run : An Overlapping Generations Perspective

People have the natural tendency to be optimistic and believe that good outcomes in the future are more likely, but also want to avoid overestimation that could result in bad decision-making. Brunnermeier, Gollier and Parker (2005, 2007) established an optimal beliefs framework that balances these two incentives. This paper follows and extends the optimal beliefs framework to consider optimal beliefs in the long run in an overlapping generations sense. Assuming no short-selling, result shows that, in almost all cases, there does not exist a stable and interior long-term optimal belief