We present a dynamic model of venture capital financing, described as a sequential investment problem with uncertain outcome. Each venture has a critical, but unknown threshold beyond which it cannot progress. If the threshold is reached before the completion of the project, then the project...

This paper proposes a new approach for modeling investor fear after rare disasters. The key element is to take into account that investors' information about fundamentals driving rare downward jumps in the dividend process is not perfect. Bayesian learning implies that beliefs about the...

Neoclassical finance assumes that investors are Bayesian. In many realistic situations, Bayesian learning is challenging. Here, we consider investment opportunities that change randomly, while payoffs are observable only when invested. In a stylized version of the task, we wondered whether...

The behavioural finance literature attributes the persistent market misvaluation observed in real data to the presence of deviations from rational thinking of the actors involved. Cognitive biases and the use of simple heuristics can be described using expected utility maximising agents that...

How do people cope with tail risk? In a lab experiment that removed informational and incentive confounds, subjects overwhelmingly behaved like Bayesian learners. The results of simulations further revealed that if one is to survive under tail risk, one needs to follow the Bayesian approach, as...

We develop a behavioral theory of real options that relaxes the informational and behavioral assumptions underlying applications of financial options theory to real assets. To do so, we augment real option theory's focus on uncertain future asset values (prospective uncertainty) with feedback...

We consider a market economy where two rational agents are able to learn the distribution of future events. In this context, we study whether moving away from the standard Bayesian belief updating, in the sense of under-reaction to some degree to new information, may be strategically convenient...

This paper studies market selection in an Arrow-Debreu economy with complete markets where agents learn over misspecified models. Under model misspecification, standard Bayesian learning loses its formal justification and biased learning processes may provide a selection advantage. However,...

Uncertainty faced by individual firms appears to be heterogeneous. In this paper, I construct new empirical measures of firm-level uncertainty using data from the I/B/E/S and Compustat. These new measures reveal persistent differences in the degree of uncertainty facing individual firms not...

In an economy where growth is determined by the interaction of R&D and learning-by-doing (LBD), changes of factors that stimulate either one of these activities affect growth differently than in an economy where growth is determined by either R&D or LBD alone. In particular, when firms...