Title: An agent-based model of rational optimism

Authors: Pedro J. Gutiérrez Diez; Carlos R. Palmero

Addresses: Dpto. de Fundamentos del Análisis Económico e Historia e Instituciones Económicas, Facultad de CC.EE. y EE, Universidad de Valladolid, Avda. Valle Esgueva, 6, 47011, Valladolid, Spain ' Dpto. De Economía Aplicada (Matemáticas), Facultad de CCEE. y EE, Universidad de Valladolid, Avda. Valle Esgueva, 6, 47011, Valladolid, Spain

Abstract: We prove that, in standard insurance markets, rational agents have an incentive to choose as subjective probabilities those incurring in an optimism bias, since they imply real and objective net gains. Our agent-based model of insurance markets thus clarifies how rational optimism naturally appears and persists in insurance markets, opening up the possibility to explain the optimism bias observed in other environments on the basis of the theory of salient perturbations. Our findings are consistent with the empirical evidence showing a systematic and coherent moderate optimism bias of agents in the assessment of probabilities.

Keywords: agent-based stochastic model; dynamical optimisation in economics; general equilibrium model; Arrow-Debreu securities; subjective probabilities; rationality; optimism bias; game theory.

DOI: 10.1504/IJRAM.2018.093743

International Journal of Risk Assessment and Management, 2018 Vol.21 No.3, pp.155 - 183

Available online: 25 Jul 2018 *

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