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Diagnostic expectations and credit cycles

Abstract:

We present a model of credit cycles arising from diagnostic expectations – a belief formation mechanism based on Kahneman and Tversky’s (1972) representativeness heuristic. Diagnostic expectations overweight future outcomes that become more likely in light of incoming data. The expectations formation rule is forward looking and depends on the underlying stochastic process, thus being immune to the Lucas critique. Diagnostic expectations reconcile extrapolation and neglect of risk in a unified...

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Publication status:
Published
Peer review status:
Peer reviewed

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Publisher copy:
10.1111/jofi.12586

Authors


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Institution:
University of Oxford
Department:
Kellogg College
Oxford college:
Kellogg College
Role:
Author
More from this funder
Funding agency for:
Gennaioli, N
Publisher:
Wiley Publisher's website
Journal:
Journal of Finance Journal website
Volume:
73
Issue:
1
Pages:
199-227
Publication date:
2018-01-26
Acceptance date:
2017-02-22
DOI:
EISSN:
1540-6261
ISSN:
0022-1082
Source identifiers:
684117
Pubs id:
pubs:684117
UUID:
uuid:a78deb53-6193-41e8-b5ff-50647f4e7263
Local pid:
pubs:684117
Deposit date:
2017-03-07

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