Uncertainty, Expectations, and Financial Instability: Reviving Allais's Lost Theory of…

Hardcover | November 18, 2014

byEric Barthalon

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Eric Barthalon applies the neglected theory of psychological time and memory decay of Nobel Prize-winning economist Maurice Allais (1911-2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests economic agents perceive the flow of clocks' time and forget the past at a context-dependent pace: rapidly in the presence of persistent and accelerating inflation and slowly in the event of the opposite situation. Barthalon recasts Allais's work as a general theory of "expectations" under uncertainty, narrowing the gap between economic theory and investors' behavior.

Barthalon extends Allais's theory to the field of financial instability, demonstrating its relevance to nominal interest rates in a variety of empirical scenarios and the positive nonlinear feedback that exists between asset price inflation and the demand for risky assets. Reviewing the works of the leading protagonists in the expectations controversy, Barthalon exposes the limitations of adaptive and rational expectations models and, by means of the perceived risk of loss, calls attention to the speculative bubbles that lacked the positive displacement discussed in Kindleberger's model of financial crises. He ultimately extrapolates Allaisian theory into a pragmatic approach to investor behavior and the natural instability of financial markets. He concludes with the policy implications for governments and regulators. Balanced and coherent, this book will be invaluable to researchers working in macreconomics, financial economics, behavioral finance, decision theory, and the history of economic thought.

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From the Publisher

Eric Barthalon applies the neglected theory of psychological time and memory decay of Nobel Prize-winning economist Maurice Allais (1911-2010) to model investors' psychology in the present context of recurrent financial crises. Shaped by the behavior of the demand for money during episodes of hyperinflation, Allais's theory suggests e...

Eric Barthalon is the global head of capital markets and tactical asset allocation at Allianz Investment Management in Munich, Germany. Throughout more than three decades of exposure to capital markets in global financial institutions (at Paribas and Allianz), in which he has focused constantly on asset management, Barthalon has sough...
Format:HardcoverDimensions:448 pages, 9 × 6 × 0.98 inPublished:November 18, 2014Publisher:Columbia University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0231166281

ISBN - 13:9780231166287

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Read the first chapter, "Expectations Before the Rational Expectations Revolution":

Table of Contents

List of TablesList of FiguresPrefaceAcknowledgmentsIntroductionGlossary of Mathematical Symbols in Order of AppearancePart 1. The Progressive Emergence of Expectations in Economic Theory1. Expectations Before the Rational Expectations Revolution2. Rational Expectations Are Endogenous to and Abide by ''the'' ModelPart 2. Allais's Theory of "Expectations" Under Uncertainty3. Macrofoundations of Monetary Dynamics4. Microfoundations of Monetary Dynamics: The HRL Formulation of the Demand for Money5. The Fundamental Equation of Monetary Dynamics6. Joint Testing of the HRL Formulation of the Demand for Money and of the Fundamental Equation of Monetary DynamicsPart 3. Transposing the HRL Formulation to Financial Markets: Preliminary Steps7. Allais's HRL Formulation: Illustration of Its Dynamic Properties by an Example of Hyperinflation (Zimbabwe 2000-2008)8. The HRL Formulation and Nominal Interest RatesPart 4. The HRL Formulation and Financial Instability9. Perceived Returns and the Modeling of Financial Behavior10. Downside Potential Under Risk: The Allais Paradox and Its Conflicting Interpretations11. Downside Potential Under Uncertainty: The Perceived Risk of Loss12. ConclusionAppendix A: How to Compute Zn and znAppendix B: Nominal Interest Rates and the Perceived Rate of Nominal GrowthAppendix C: ProofsAppendix D: Comparison Between the Kalman Filter and Allais's HRL AlgorithmAppendix E: A Note on the Theory of Intertemporal ChoiceAppendix F: Allais's Cardinal Utility FunctionNotesBibliographyIndex

Editorial Reviews

An intellectual stretch for most charterholders, but the few who take the time to work through its complexities will be rewarded by seeing something that is considered old and tired as actually fresh and insightful.