This Time is Different

Research output: Working paper

Abstract

Systematic deviations from ostensibly rational beliefs appear in many economic, financial, and business contexts. This paper introduces a steady-state competitive equilibrium model where firms’ knowledge of the market aggregates does not determine their beliefs about their own abilities. Firms maximize expected profit and hold beliefs that are calibrated with available statistical information. Yet firms believe that market statistics, while accurately describe what happens to others, do not apply to them, that when it comes to their own projects, ‘this time is different.’ In particular, firms and outside observers agree that market participants are, on average, over-optimistic. They also correctly anticipate a market equilibrium with over-entry and high failure rates relative to the objective distribution of productivity. Implications for corporate finance patterns are explored.
Original languageEnglish (US)
StatePublished - Mar 2015

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