An Economic Analysis of Failure Experience
The IUP Journal of Risk & Insurance, Vol. VI, Nos. 3 & 4, pp. 22-27, July & October 2009
Posted: 18 Oct 2009
Date Written: October 13, 2009
The purpose of this study is to investigate the effect of failure experience. This study builds the two-period model including the educational investment and failure experience by answering the following three questions. First, if the effect of failure experience exists, how does the investment change in comparison with the non-existing case‘ Second, what is the effect of the initial wealth in relation to the effect of failure experience‘ Third, what is the situation where the effect of failure experience is large‘ The results of the model are as follows: First, if the effect of failure experience exists, the possibility of the investment enlarges. Second, if the initial wealth is so small and the individual must borrow the money to invest in the second period, the possibility of the investment with the effect of failure experience becomes small. Third, the high profitability of the investment, small interest rate, and large initial wealth are the conditions to enlarge the possibility of investment with the effect of failure experience.
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