Diverse Beliefs

Abstract

This paper presents a general framework for studying diverse beliefs in dynamic economies. Within this general framework, the characterization of a central-planner general equilibrium turns out to be very easy to derive, and leads to a range of interesting applications. We show how for an economy with log investors holding diverse beliefs, rational overconfidence is to be expected; volume-of-trade effects are effectively modeled; a range of sample moments from macroeconomic growth data can be closely approximated; and the Keynesian ‘beauty contest’ can be modeled and analysed. We remark that models where agents receive private information can formally be considered as models of diverse beliefs.

Keywords: Diverse beliefs, Heterogeneous beliefs, Beauty Contests, Trading Volumes

JEL Classification: D5, D84, G11, G12