Some properties of subjective probabilities induced by optimal expectations |
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| Authors: | Hideki Iwaki Yusuke Osaki |
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| Institution: | 1. Center for Musculoskeletal Research, University of Tennessee, Knoxville, Tennessee;2. Department of Orthopedic Surgery, Tamatsukuri-Koseinenkin Hospital, Matsue, Shimane, Japan;1. Department of Cardiology, 2nd Medical School of Charles University and University Hospital Motol, Prague, Czech Republic;2. Department of Cardiology, Cardiovascular Center, Podlesi Hospital, T?inec, Czech Republic |
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| Abstract: | In this paper, we examine the properties of subjective probabilities induced by optimal expectations. We show that investors who follow optimal expectations underweigh small probabilities and overweigh large probabilities in a simple binary economy. This indicates that the subjective probabilities induced by optimal expectations are incompatible with experimentally observed results under the rank dependent probability assumption. |
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