Uncertainty, Expectations, and Financial Instability

Eric Barthalon

Eric Barthalon

Uncertainty, Expectations, and Financial Instability

Reviving Allais's Lost Theory of Psychological Time

Columbia University Press | 2014

https://doi.org/10.7312/bart16628

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About this book

Eric Barthalon applies the neglected theory of psychological time and memory decay of Maurice Allais to model investors’ psychology in the present context of recurrent financial crises

Author information

Eric Barthalon is the global head of capital markets and tactical asset allocation at Allianz Investment Management in Munich, Germany. Throughout more than three decades of exposure to capital markets in global financial institutions (at Paribas and Allianz), in which he has focused constantly on asset management, Barthalon has sought to blend operational and research responsibilities, action with theoretical reflection. He received a Masters in Management from ESCP–Europe.

Reviews

An intellectual stretch for most charterholders, but the few who take the time to work through its complexities will be rewarded by seeing something that is considered old and tired as actually fresh and insightful.

2015 Maurice Allais Prize in Economic Science citation:
The jury of the 2015 Maurice Allais prize in economic science has nominated a seasoned investment professional, Eric Barthalon, for his book, Uncertainty, Expectations, and Financial Instability. Maurice Allais has constantly sought to bring economic theory as close as possible to empirical observations; fostering communication between practitioners and theorists has therefore been one of his long standing priorities. In this respect, the work submitted by Eric Barthalon to the Maurice Allais foundation is a model, while at the same time it is of rare scientific quality in such a context. In the first part of his book, Eric Barthalon expounds Allais's monetary theory with a command and puts it in a perspective, which no other book offers. As indicated by the subtitle, he advocates reinstating Allais's lost theory of psychological time in core economic theory. Emphasized is the fact that investors' expectations are not as rational as neoclassical economic theory claims them to be and that investors' memory is context-dependent, long in stable environment, shorter and shorter during bubbles, a proposition which is at the heart of Maurice Allais's monetary theory. In the second part of his book, Eric Barthalon investigates the issue of financial instability by means of Allais's theory of psychological time. His unearthing of a hitherto unseen empirical relationship between long-term nominal interest rates and the rate of nominal growth subjectively perceived by market participants adds a new chapter to Allais's monetary theory. In the last chapters, Eric Barthalon starts building original and promising bridges with the modeling of financial behavior. He also touches upon some important policy issues, like fractional reserve banking, which – as Allais and other economists before him – he holds for a key source of financial instability.

Frontmatter Free access PDF PDF	i
Contents Free access PDF PDF	vii
List of Tables Access restricted Content is available PDF PDF	xi
List of Figures Access restricted Content is available PDF PDF	xv
Acknowledgments Access restricted Content is available PDF PDF	xxiii
Glossary of Mathematical Symbols in Order of Appearance Access restricted Content is available PDF PDF	xli
CHAPTER ONE. Expectations Before the Rational Expectations Revolution Access restricted Content is available PDF PDF	3
CHAPTER TWO. Rational Expectations Are Endogenous to and Abide by ‘‘the’’ Model Access restricted Content is available PDF PDF	17
Introduction Access restricted Content is available PDF PDF	43
CHAPTER THREE. Macrofoundations of Monetary Dynamics Access restricted Content is available PDF PDF	47
CHAPTER FOUR. Microfoundations of Monetary Dynamics: The HRL Formulation of the Demand for Money Access restricted Content is available PDF PDF	67
CHAPTER FIVE. The Fundamental Equation of Monetary Dynamics Access restricted Content is available PDF PDF	95
CHAPTER SIX. Joint Testing of the HRL Formulation of the Demand for Money and of the Fundamental Equation of Monetary Dynamics Access restricted Content is available PDF PDF	113
CHAPTER SEVEN. Allais’s HRL Formulation: Illustration of Its Dynamic Properties by an Example of Hyperinflation (Zimbabwe 2000--2008) Access restricted Content is available PDF PDF	131
CHAPTER EIGHT. The HRL Formulation and Nominal Interest Rates Access restricted Content is available PDF PDF	153
CHAPTER NINE. Perceived Returns and the Modeling of Financial Behavior Access restricted Content is available PDF PDF	183
CHAPTER TEN. Downside Potential Under Risk: The Allais Paradox and Its Conflicting Interpretations Access restricted Content is available PDF PDF	201
CHAPTER ELEVEN. Downside Potential Under Uncertainty: The Perceived Risk of Loss Access restricted Content is available PDF PDF	241
CHAPTER TWELVE. Conclusion Access restricted Content is available PDF PDF	265
APPENDIX A. How to Compute Zn and zn Access restricted Content is available PDF PDF	271
APPENDIX B. Nominal Interest Rates and the Perceived Rate of Nominal Growth Access restricted Content is available PDF PDF	275
APPENDIX C. Proofs Access restricted Content is available PDF PDF	277
APPENDIX D. Comparison Between the Kalman Filter and Allais’s HRL Algorithm Access restricted Content is available PDF PDF	327
APPENDIX E. A Note on the Theory of Intertemporal Choice Access restricted Content is available PDF PDF	331
APPENDIX F. Allais’s Cardinal Utility Function Access restricted Content is available PDF PDF	343
Notes Access restricted Content is available PDF PDF	347
Bibliography Access restricted Content is available PDF PDF	367
Index Access restricted Content is available PDF PDF	375
Preface Access restricted Content is available PDF PDF	xix
Introduction Access restricted Content is available PDF PDF	xxxi

Uncertainty, Expectations, and Financial Instability

Reviving Allais's Lost Theory of Psychological Time

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