2022 SAET Conference: Hicks Lecture - Larry Samuelson (Yale University)

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Research School of Economics (CBE)

Title: Wishful, Inattentive or Rational?  Building Bridges Between Decision Theory and Stochastic Growth

Manning Clark Hall, Cultural Centre Building 153, Kambri, ANU

2022 SAET Conference - July 16 - 22, 2022

Welcome to the 21st annual SAET Conference being held at the Australian National University in Canberra, Australia from 16-22 July 2022.

This paper develops connections between stochastic growth problems and decision problems. We study processes that can be interpreted as population growth or wealth accumulation. We show that the outcomes of these processes can depend critically on realizations of the uncertainty that are extremely unlikely but that have extremely important implications for growth. Using these results, we show that wishful thinking decision problems are behaviorally equivalent to utility maximization problems, and that rational inattention problems are equivalent to optimal portfolio problems. The growth process generates extreme (wealth or genetic) inequality. The winners under a growth process incorporating idiosyncratic risk face an empirical distribution of shocks that equals the subjective probability distribution chosen by the wishful thinker. The winners under aggregate uncertainty face an empirical joint distribution of states and actions equal to that of the optimizing rationally inattentive decision maker. As an example of how these connections can be exploited, we show that rational inattention techniques can be used to solve the optimal portfolio problem. About our presenter - Professor Larry SamuelsonLarry Samuelson is the A. Douglas Melamed Professor of Economics at Yale University and the former director of the Cowles Foundation for Research in Economics. Samuelson earned his B.A. from the University of Illinois in 1974 and his Ph. D. in Economics from the University of Illinois in 1978. He has previously held faculty positions at the University of Florida, Syracuse University, Penn State University and the University of Wisconsin. He works in economic theory, with a particular interest in game theory. He has served as a co-editor of Econometrica. the American Economic Review, and the American Economic Review: Insights, and the president of the Game Theory Society, and in various roles in the Econometric Society. He is a Fellow of the Econometric Society and the American Academy for the Arts and Sciences.

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