We propose an extension of the class of rational expectations bubbles (REBs) to the more general rational beliefs setting of Kurz (1994a,b). In a potentially non-stationary but stationarizable environment, it is possible to hold more than one (small-r) “rational” expectation. When rational...

We investigate the extent to which price deviations from fundamental values in an experimental asset market are due to the uncertainty of subjects regarding others' rationality. We do so by comparing the price forecasts submitted by subjects in two market environments: all six traders are human...

In this paper we investigate four hypotheses which are inconsistent with expected utility theory, but may well be explained by prospect theory. It deals with framing, the non-linearity of subjective probabilities, the disposition effect, and the correspondence of different experimental risk...

In this paper I study the relationship between rationality and asset prices when agents have heterogeneous and incorrect beliefs about future events. Using the fully rational pricing as a benchmark, I show that when agents behave according to the Subjective Generalized Kelly rule (Bottazzi et...

We study banks' incentive to pool assets of heterogeneous quality when investors evaluate pools by extrapolating from limited sampling. Pooling assets of heterogeneous quality induces dispersion in investors' valuations without affecting their average. Prices are determined by market clearing...