Will there be a dollar crisis?
(2008 Nobel Laureate
Paul Krugman)
"Almost everyone believes that the US current account deficit
must eventually end, and that this end will involve dollar depreciation.
However, many believe that this depreciation will take place gradually.
... any process of gradual dollar
decline fast enough ... would impose capital losses
on investors much larger than they currently expect.
As a result, there will at some point have to be ...
a point at which expectations are revised, and the dollar drops sharply ..."
more
Principle of Uncertain Future
... The probability of a future event contains uncertainty ...
This uncertainty hinders probability to reach 100% (*and, sometimes, 0%)
Pfuture ≤ 100% - δP
*Pfuture ≥ δP
The present total probability of a future event is incomplete
Σ Pfuture, foreseen < 100%
The principle of uncertain future provides an uniform solution:
of the underweighting high and the overweighting of low probabilities,
of the Allais paradox, of risk aversion,
of the "4-Fold-Pattern" paradox, of the incompleteness of systems of preferences,
of the Ellsberg paradox, etc.
The principle of uncertain future originates a formula of forecasting:
F ≅ Fbase
[∏(1+kmultiplicat)]
[1+Σφaddit]
[1±Δerror]
more
Facts and myths about the financial crisis
"The United States is indisputably undergoing a financial crisis.
Here we examine four claims about the way the financial crisis is affecting
the economy as a whole and argue that all four claims are myths ...
Our main point is that policymakers have not done the hard work of convincing the
public - or even academic economists - of the precise nature of the market failure ... "
more
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Forecasting
Forecasting the World Economy in the Short-Term
Analyzing Macroeconomic Forecastability
Forecasting metadata news:
To Combine Forecasts or ... Information?
Did ... Economic Growth Cause the Oil Price Shock of 2003-2008?
The New Keynesian Monetary Model: Does it Show ...?
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Economics
More myths about the financial crisis of 2008
Economics metadata news:
Facts and myths about the financial crisis of 2008
Economics top's news:
...
Perspective on the Crisis of 2007-2008
(3)
Behind the 2008 Capital Market Collapse
...(7)
Economics top authors:
Stiglitz(1)
Shleifer(1)
Baum
(1)
Scandizzo
(1)
Economics 2008 top authors:
Baum
(1)
Jula(1)
Economics top items:
...
mechanics of economic development
(1)
Implications of ethnic diversity
(1)
Structural Causes of the Global Financial Crisis: ... the ‘New Financial Architecture’
(1)
Top
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Utility
S-shaped utility
...
The Valuation of Decision and Individual Welfare
...
Utility metadata
news:
...
Fuzzy set approach to the utility
...
Explaining the characteristics of the power (CRRA) utility family
Asymmetric or symmetric time preference and discounting
...
Utility reviews:
Is There A Plausible Theory for Risky Decisions?
Utility item events
Noise and Bias in Eliciting Preferences
Principle of uncertain future and utility
Utility metadata events
Imprecision as an Account
...
The Origin of Utility
Experienced Utility as a Standard
...
Utility past, timeless events
...
Generalizations of Expected Utility
...
Le Comportement de l'Homme Rationnel devant le Risque
...
Theory of Games and Economic Behavior
Exposition of a New Theory on the Measurement of Risk
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Problems & Paradoxes of Utility Theories:
The Allais paradox (modified)
Suppose Mr. Somebody offers you a choice of only one of the following:
A guaranteed gain of $99.
Or
A lottery:
The gain of $100 with the probability P(preliminary) = 99%
or
$0 with the (preliminary) probability 1%.
The mathematical expectations of guarantee and lottery outcomes
are exactly the same. But people
chose the guaranteed gain instead of the lottery.
The 4-Fold-Pattern Paradox
(simplified)
The 4-Fold-Pattern Paradox is one of the strongest qualitative tests for utility theories.
The well-determined facts are:
For positive (gains) risky prospects,
people typically
1) overweight low probabilities but
2) underweight high probabilities.
For negative (losses) risky prospects,
people typically
3) underweight low probabilities but
4) overweight high probabilities.
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New Approach:
0. The idea of the approach
Particular consideration of
(hidden)
uncertainties
(noises, fluctuations, measurements' errors, imprecision, etc.)
1.0. Principle of Uncertain Future
The estimation of the probability of a future event
should contain uncertainty.
Pfuture ≅ Pfuture mean ± ΔP
1.1. The first consequence of the principle
Analogy
Suppose we plan to test the probability value, which is equal to 99%.
Suppose the probability uncertainty value is equal to 5%.
Then, evidently, the real mean value of probability cannot be as high as 99%.
Generally,
High probabilities will decrease.
Phigh real < Phigh planned
Analogously, but considering the second consequence of the principle (see below),
Low probabilities can increase.
Plow real possible > Plow planned
1.2. The second consequence of the principle
The total probability of unforeseen future events
is more than 0%
Σ Punforeseen real > 0%
Hence,
The present total probability of future events
is less than 100%
Σ Pplanned < 100%
or
The present probability system of future events
is incomplete.
Top
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New Results. Solution & Explanation of Utility Problems:
The strongest qualitative test for Utility Theories is the 4-Fold-Pattern Paradox.
Solution & Explanation
of the 4-Fold-Pattern Paradox
(simplified as much as possible)
For positive (gains) risky prospects,
people typically
1) overweight low probabilities but
2) underweight high probabilities.
For negative (losses) risky prospects,
people typically
3) underweight low probabilities but
4) overweight high probabilities.
Denoting the real value of probability,
which value is near 100% as
Phigh real
,
the (positive) value of gain as G
and the (negative) value of loss as -G
,
we obtain
Phigh real < Phigh planned
and
G * Phigh real < G * Phigh planned
-G * Phigh real > -G * Phigh planned
2) the underweight of high probabilities gains and
4) the overweight of high probabilities losses.
Denoting the real value of probability,
which value is near 0% as
Plow real possible
we obtain
Plow real possible > Plow planned
and
G * Plow real possible > G * Plow planned
-G * Plow real possible < -G * Plow planned
1) the overweight of low probabilities gains and
3) the underweight of low probabilities losses.
Thus, the above facts can be explained naturally and uniformly.
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