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Conviction function? A new decision paradigm for personal financial risk management in the face of large exogenous shocks

Cohen, Michael, Nabin, Munirul, Bhattacharya, Sukanto and Kumar, Kuldeep 2018, Conviction function? A new decision paradigm for personal financial risk management in the face of large exogenous shocks, Theoretical economics letters, vol. 8, no. 5, pp. 918-934, doi: 10.4236/tel.2018.85065.

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Title Conviction function? A new decision paradigm for personal financial risk management in the face of large exogenous shocks
Author(s) Cohen, MichaelORCID iD for Cohen, Michael orcid.org/0000-0002-4175-0583
Nabin, MunirulORCID iD for Nabin, Munirul orcid.org/0000-0003-1680-0582
Bhattacharya, SukantoORCID iD for Bhattacharya, Sukanto orcid.org/0000-0001-6587-2879
Kumar, Kuldeep
Journal name Theoretical economics letters
Volume number 8
Issue number 5
Article ID 83697
Start page 918
End page 934
Total pages 17
Publisher Scientific Research Publishing
Place of publication Wuhan, China
Publication date 2018
ISSN 2162-2078
2162-2086
Keyword(s) financial risk
stochastic optimization
conviction function
Bayesian learning
large shocks
Summary This paper contributes to the limited-information literature on savings in astochastic environment. In particular, it contributes techniques and concepts to the question of state verification (or filtering), by including learning aboutaggregate income shocks, based on signals. As a seminal contribution to the extant literature, a “conviction function” is introduced, which takes into account histories of past prediction errors in determining how rational agents internalize such information in taking personal investment decisions. For purpose of a more transparent illustration, a numerical rendition of the posited model is provided for five consecutive time periods. We also perform a series of Monte Carlo simulations to demonstrate how the posited approach could potentially outperform traditional forward-looking models in the presence of sudden large extraneous shocks reminiscent of the recent Global Financial Crisis.
Language eng
DOI 10.4236/tel.2018.85065
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2018, the authors and Scientific Research Publishing Inc.
Free to Read? Yes
Use Rights Creative Commons Attribution licence
Persistent URL http://hdl.handle.net/10536/DRO/DU:30109433

Document type: Journal Article
Collections: Open Access Collection
Department of Management
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Every reasonable effort has been made to ensure that permission has been obtained for items included in DRO. If you believe that your rights have been infringed by this repository, please contact drosupport@deakin.edu.au.