Linking behavioral economics, axiomatic decision theory and general equilibrium theory

My dissertation links behavioral economics, axiomatic decision theory and general equilibrium theory to analyze issues in financial economics. I investigate two behavioral concepts: time-variability aversion, i.e., the aversion to volatility (fluctuation in payoffs over time) and uncertainty aversion, i.e., the aversion to uncertainty of state realizations. Chapter 1 develops a new intertemporal choice theory by endogenizing discount factors based on time-variability aversion, and shows that the new model can explain widely noted stylized facts in finance. The main contributions of this chapter are the findings that (1) time-variability aversion can be represented by time-varying discount factors based on very parsimonious axioms; (2) under the assumption of dynamic consistency, time-variability aversion implies gain/loss asymmetry in discount factors; (3) the gain/loss asymmetry boosts effective risk aversion over states by extreme dislike of losses while maintaining positive average time-discounting. This intertemporal substitution mechanism explains why the risk premium of equity needs to be very high relative to the risk-free rate.; Chapter 2 provides the conditions under which the no-trade theorem of Milgrom & Stokey (1982) holds for an economy of agents whose preferences follow uncertainty aversion as captured by the multiple prior model of Gilboa and Schmeidler (1989). First, I prove that given the agents' knowledge of the filtration, dynamic consistency and consequentialism imply that a set of ex-ante priors must satisfy the recursive structure. Next, I show that with perfect anticipation of ex-post knowledge, the no-trade theorem holds under the economy such that agents follow dynamically consistent multiple prior preferences.; Chapter 3 examines risk-sharing among agents who are uncertainty averse. The main objective is to provide conditions in the exchange economy such that agents' effective priors (and equilibrium consumptions) will be comonotonic and their marginal rates of substitution (weighted by these priors) will be equalized when agents have heterogeneous multiple prior sets. One set of sufficient conditions is for each agent's multiple prior set to be symmetric (or to be defined by a convex capacity) around the center of the simplex.