Rietz and "nearly infinite"

Professor Volokh objects to the use of the term “nearly infinite”. A commenter says “It means that if you were given an infinite amount of x, rather than the finite but large amount of x that you already posses, there would be no appreciable impact on your results,” and then goes on say that the difference between having an infinite amount of nuclear weapons and the number needed to blow up the word would be a good context for the phrase as “we only have one planet to destroy.”

For some reason this reminded me of Rietz’ paper on ‘solving’ the equity premium puzzle. Basically, he adds catastrophic states to his models which are very devastating yet very unlikely events. This band-aid to the CAPM seems to work and I think it can be explained by the commenters meaning of the phrase “nearly infinite”. Economic agents have in the back of there mind a very, very bad event that is very unlikely, but economic agents only have one life to live (or destroy). They would be very adverse to that event occurring but may otherwise have little ‘day to day’ risk aversion.

Advertisements

0 Responses to “Rietz and "nearly infinite"”



  1. Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s





%d bloggers like this: