Article ID Journal Published Year Pages File Type
973398 Mathematical Social Sciences 2006 20 Pages PDF
Abstract

We define pessimistic, respectively optimistic, investors as CEU (Choquet expected utility) decision makers who update their pessimistic, respectively optimistic, capacities according to a pessimistic (Dempster–Shafer), respectively optimistic, update rule. We demonstrate that pessimistic rather than optimistic investors may strictly prefer investing in an illiquid asset to investing in a liquid asset. Key to our result is the dynamic inconsistency of CEU decision making, implying that a CEU decision maker ex ante prefers a different strategy with respect to prematurely liquidating an uncertain long-term investment project than after learning her liquidity needs. Investing in an illiquid asset therefore serves as a commitment device that guarantees an ex ante favorable outcome. Comparing our results with the hyperbolic time-discounting approach, we further demonstrate that pessimistic decision makers may exhibit a stronger desire for intra-personal commitment than investors with hyperbolic discount functions.

Related Topics
Physical Sciences and Engineering Mathematics Applied Mathematics
Authors
, ,