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Equity Pricing: Perfect Foresight versus Rational Expectations

Equity Pricing: Perfect Foresight versus Rational Expectations

Our study does not challenge the substance of Baek et al. [1], other than to challenge its assumption of perfect foresight. By definition, a Schumpeterian event is one which makes existing technologies obsolete, and by extension, we would expect most Schumpeterian events to occur unexpectedly. Thus, we pro- pose that a more realistic pricing model would be one where the length of the excess earnings period is not known with perfect foresight, but only estimated, based upon some marginal distribution function f ( x ) .

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Paradoxes of Perfect Foresight in General Equilibrium Theory

Paradoxes of Perfect Foresight in General Equilibrium Theory

strategies of White and of Black, the game is completely determined, there are no further decisions to make: calculability means each player can formulate and carry out their own strategy without any more knowledge of the strategy of the other opponent than is entailed in the knowledge of the past and the present. but perfect foresight is not a prerequisite. Perfect foresight is guaranteed if, for simplicity, we further assume both players announce their strategy during tˆ atonnement. We may as well assume discrete finite time, from t = 0 to t = N , as before, t takes on integral values only. We agreed, before, that a plan was given by the complete future course of transactions of all sorts of an actor. Since there are only finitely many points of time and finitely many sorts of transactions there are only finitely many pieces of information needed (in one sense, i.e. in the context of analysis—not in the sense of information theory). For simplicity, let us assume in fact that the knowledge of C(t) suffices. Then the space of plans is a finite dimensional space.

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A remark on the supposed equivalence between complete markets and perfect foresight hypothesis

A remark on the supposed equivalence between complete markets and perfect foresight hypothesis

Because of the continuity of equilibria of the second-period economy in the case where n > m, the unique system of expected prices, which were determined in the first period by an equilibrium system identical to that with complete markets, will consequently not be generically realized. In other words, expectations formed on the grounds of an Arrow-Debreu equilibrium system can capture only one of the infinite configurations which prices can assume in the second- period equilibrium of a sequential model over two periods. Consequently, no equivalence between the perfect foresight hypothesis and complete markets can correctly be advanced.

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Monotone Methods for Equilibrium Selection under Perfect Foresight Dynamics

Monotone Methods for Equilibrium Selection under Perfect Foresight Dynamics

We then study the class of binary supermodular games, for which we obtain complete characterizations for linear absorption and for global acces- sibility. These characterizations are applied to three subclasses. First, for unanimity games, we show that our selection criterion is not in agreement with that in terms of Nash product. 8 In fact, the perfect foresight dy- namics fails to select a single Nash equilibrium for some unanimity games. A nondegenerate example (Example 5.2.1 in Subsection 5.2) demonstrates that the two strict Nash equilibria are mutually accessible, actually glob- ally accessible, for a small friction. Second, for games with linear incentives (Selten (1995)), we find a connection to the concept of spatial dominance due to Hofbauer (1999). It is shown that if a strict Nash equilibrium is glob- ally accessible under the perfect foresight dynamics with a small friction, then it is spatially dominant. This implies in particular that for (generic) games with linear incentives, a globally accessible equilibrium is unique if it exists. 9 Third, we introduce the class of games with invariant diagonal, in which all players receive the same payoffs when they all play the same mixed strategy. For this class of games, we obtain the generic existence of a linearly absorbing and globally accessible equilibrium for a small friction. The concept of perfect foresight path requires that agents optimize against their beliefs about the future path of the action distribution and that those beliefs coincide with the actual path. Relaxing the latter requirement, Matsui and Oyama (2002) introduce the model of rationalizable foresight dynamics, where while the rationality of the agents as well as the struc- ture of the society is common knowledge, beliefs about the future path are not necessarily coordinated among the agents. It is instead assumed that the agents form their beliefs in a rationalizable manner: in particular, they may misforecast the future. A rationalizable foresight path is a feasible path along which every revising agent optimizes against another rationalizable foresight path. We show that in supermodular games, a linearly absorbing and globally accessible state is the unique state from which no rationalizable foresight path escapes. That is, our stability results for supermodular games also hold under the less demanding assumption of rationalizable foresight.

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Public expenditure on health and private old age insurance in an OLG growth model with endogenous fertility: chaotic cycles under perfect foresight

Public expenditure on health and private old age insurance in an OLG growth model with endogenous fertility: chaotic cycles under perfect foresight

This paper examines the dynamical role played by both the intra-family transfers for old-age backing and the public health spending on the equilibrium dynamics in the standard OLG growth model extended with endogenous fertility and mortality behaviour. It is shown that under perfect foresight of individuals, the public provision of health care services, which determines the individual length of life, as well as the size of the intra-family transfer may determine complex dynamics, and, more interestingly, a rich qualitative dynamical behaviour such as the “bubbling” phenomenon. In particular, it is shown that (i) the introduction and the rise of public health spending may initially destabilise the economy and thus trigger complex business cycles, while eventually acting act as an economic stabiliser, thus triggering a return to stability, and (ii) the economy may be stable under either low or high levels of the “gift” rate, while intermediate-sized values of it initially produces a loss of stability with consequent complex dynamics while and subsequently a re-switch of stability occur.

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Iterated Potential and Robustness of Equilibria

Iterated Potential and Robustness of Equilibria

For any given set-valued solution concept, it is possible to consider iterative elimination of actions outside the solution set. This paper applies such a procedure to define the concept of iterated monotone potential maximizer (iterated MP-maximizer). It is shown that under some monotonicity conditions, an iterated MP-maximizer is robust to incomplete information (Kajii and Morris, Econometrica 65 (1997)) and absorbing and globally accessible under perfect foresight dynam- ics for a small friction (Matsui and Matsuyama, Journal of Economic Theory 65 (1995)). Several simple sufficient conditions under which a game has an iterated MP-maximizer are also provided. Journal of Economic Literature Classification Numbers: C72, C73, D82.

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The monetary analysis of hyperinflation and the appropriate specification of the demand for money

The monetary analysis of hyperinflation and the appropriate specification of the demand for money

The first approach includes in the models a mechanism of sluggish adjustment of some nominal variable like expected inflation, money holdings or the exchange rate. Sufficiently slow adaptive expectations, as in Evans and Yarrow (1981) or Bruno and Fischer (1990), learning as in Marcet and Nicolini (2003) or Adam et al (2006), a crawling peg rule for the exchange rate as in Bruno (1989), or a sufficiently slow adaptive adjustment on the money market as in Kiguel (1989) can restore the correct running of this class of models. However, even if one can find arguments in favour of the use of adaptive expectations during hyperinflationary episodes, as Bruno and Fischer (1990) do for instance, it is hard to justify the persistent presence of behaviours involving either systematic forecast mistakes or maladjustments resulting in prohibitive costs for the agents in a hyperinflationary context. The second approach maintains perfect foresight assuming that agents respond most likely instantaneously to changes in inflation during hyperinflation but abandons the Cagan money demand function. Ashworth and Evans (1998) look for empirical support for other functional forms than the Cagan money demand. Vazquez (1998), Gutierrez and Vazquez (2004) or Barbosa et al (2006) develop inflationary finance monetary optimizing models to obtain a demand for real cash balances compatible with explosive hyperinflation and perfect foresight. This paper follows this second approach.

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Bertrand competition with intertemporal demand

Bertrand competition with intertemporal demand

if all consumers had perfect foresight (see right-hand side of (9)). The latter quantity never exceeds the first, by monotonicity of the demand function D, so the range of collusive prices against consumers with perfect foresight always contains the range of collusive prices against consumers with martingale expectations, for any time prefer- ence β > 0 that the consumers may have. In this sense, consumers are worse off if they (are known by the firms to) have perfect foresight - consumers’ foresight unam- biguously facilitate collusion against them. We believe this qualitative conclusion to also hold in intermediate cases, when, say, some consumers have perfect foresight and others hold martingale expectations, as well as when all or some consumers form expectations between these two extremes.

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Reducing sequence risk using trend following and the CAPE ratio

Reducing sequence risk using trend following and the CAPE ratio

In this Table we present statistics for an investor beginning a 20-year decumulation period beginning in 1995, where investment returns are all driven by the real return on the S&P500 with a trend following overlay. The second column in the table presents the annual, real return achieved from investing in a buy-and-hold S&P 500 equity portfolio. The third column in the table presents the 1/CAPE value (EY) at the start of each decumulation year. The columns under the heading “Perfect Foresight PWA”, present the value of the investment fund at the start of each year, the annual, perfect foresight withdrawal amount, and the value of the investment fund at the end of each year respectively. The columns under the heading “Monte Carlo Median PWA” present: the value of the investment fund at the start of each year; the annual, perfect foresight withdrawal amount as a proportion of the fund; the cash withdrawal amount; and the value of the investment fund at the end of each year respectively, where the Median PWA has been determined by the Monte Carlo technique described in the text which is applied using data up to the start of the next withdrawal year. The columns under the heading “CAPE-Based PWA” present: the value of the investment fund at the start of each year; the annual, perfect foresight withdrawal amount as a proportion of the fund; the cash withdrawal amount; and the value of the investment fund at the end of each year respectively, where the PWA has been determined at the start of each year by the CAPE regression described in the text.

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Hicks' thread (out of the equilibrium labyrinth)

Hicks' thread (out of the equilibrium labyrinth)

Before they can affect behaviour, mistakes need to be identified and in- terpreted. It is therefore proper to single out two kinds of theories – one relative to economic history, the other to economic policy – approaching mistakes ex-post and ex-ante respectively, with the former however func- tionally prior to the latter. The history-related economic theory aims at explaining co-ordination failures, i.e., one’s mistakes due to inconsistencies with others’ prospects and plans. Co-ordination failures can be discerned counterfactually, using ex-post perfect foresight performance as a measuring stick to assess the mistakenness of actual past expectations. Since measures derived in this way are perfectly robust for a single period, Hicks named this theory ‘Single Period Theory’.

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Foresight in a small country in transition: Preliminary lessons of the Hungarian Technology Foresight Programme

Foresight in a small country in transition: Preliminary lessons of the Hungarian Technology Foresight Programme

Global trends cannot be stopped at national borders, and new technology is playing a growing role in our world characterised by increasingly rapid change. The world is also becoming more competitive, with national competitiveness depending on technological, organisational and social innovation. As it is widely realised firms cannot survive the ever more fierce global competition without investing in emerging technologies and strategic research. These activities, however, are often too risky or too expensive for industry to take sole responsibility for them. Therefore governments must assume at least part of the financial responsibility. This, in turn, requires setting R&D priorities, based on thorough, comprehensive, strategic analysis, as even the richest countries cannot afford to support all research programmes. Technology foresight – a systematic means of assessing that scientific and technological development which could have a strong impact on industrial competitiveness, wealth creation and quality of life – provides an essential tool to this end. Another reason why governments have to take part in foresight is that exploitation of science and technology largely depends on effective networking between business, academia and government. Many governments have realised the importance of foresight activities, and thus this relatively new, and innovative, technology policy tool is spreading across continents. 1

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Technology Foresight Fund

Technology Foresight Fund

Having completed this important task, the recommendations contained in the Technology Foresight Reports have been the subject of both detailed scrutiny and further consultation by us in the Department of Enterprise, Trade and Employment in order to devise the most appropriate mechanisms for their implementation. The consultation process has culminated in the proposal to set up the £560 million Technology Foresight Fund which was recently approved by the Government.

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The cybercommunity Second Life is an environment where perfect surveillance is endemic to the environment. Second Life was created to replicate, reflect, extend and expand the real world, and therefore contains features common to many contemporary societies, cultures and all kinds of advanced human activities. Thus, sociologically, Second Life is an authentic social community with a rich communal life, including deviance. Technologically, however, it is a piece of computer software – its functions and limitations are determined by the programmers who design and build the system architecture. Thus, it is perfectly possible for the programmers to build automated systems which carry out actions that prevent, confront or punish deviant behaviour at any time, with no need for human input and no room for subjects to negotiate with the surveillance regime. Actually, Second Life is a place where ‘dataveillance’ (van der Ploeg 2003: 71) is endemic – every word typed by the residents and every movement made by their virtual bodies can be observed, recorded, stored in digital files and pored over in real time or later over long time intervals. In this way, Second Life is a true automated socio-technical environment – an extreme exemplar of many automated socio-technical environments constructed by tracking devices, machine-based access control, automated CCTV, and so on, in the real world (cf. Lianos and Douglas 2000). In the cybercommunity, it is possible to use “No other logic than whatever is programmed into [its] software whereby access is accepted or denied; identity is either confirmed or rejected; behaviour is either legitimate or illegitimate” (Norris 2003: 276). Indeed, Second Life can create and sustain a totalitarian cyber state that is equal to anything found in science fiction – even in the work of the bleakest imagination building on George Orwell’s Nineteen Eighty-Four (1948).

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Evolving foresight in a small transition economy: The design, use and relevance of foresight methods in Hungary

Evolving foresight in a small transition economy: The design, use and relevance of foresight methods in Hungary

Second, TEP has also shown, that foresight can be relevant even in a small country, which is not at the forefront of technological development but rather in the semi-periphery. A number of factors seem to contradict this conclusion at first glance. Foresight can be a costly project in terms of money, and even more so if participants’ time required by meetings, workshops and surveys is taken into account. Moreover, advanced countries, whose experts, in turn, know more about the leading edge technologies, regularly conduct their foresight programmes, and their ‘products’ – reports, Delphi-survey results – are readily available. Yet, only a national programme can position a country in the global context and spark a discussion on how to react to major trends. Similarly, strength, weaknesses, opportunities and threats (SWOT) of a given country would not be analysed by others, let alone broad socio-economic issues. Process benefits cannot be achieved without a national programme either. Without these, a country would not be able to improve the quality of life of her population and enhance her international competitiveness.

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Foresight styles of strategy level leaders

Foresight styles of strategy level leaders

The Foresight Styles Assessment (Dian 2009; Gary 2008, 2009) was regarded as an important measure of a strategy level leader’s dominant and back-up styles of engaging with matters related to anticipating the future. Dian (2009) proposes that Foresight Styles are in essence a reflection of the style with which individuals cognitively respond to change and their envisioned prospects of the future. Foresight is embedded in the roles and tasks of strategy-level leaders. Foresight Styles explain how foresight cognitions differ from individual to individual within the context of their internal disposition used to understand the future. Gary (2008) notes that these cognitive dispositions emerge from an individual’s innate innovativeness and response to differing contexts dependent on temporal cognitions. These differ according to their propensities to tolerate risk, creativity, tolerate ambiguity, their value orientations, in addition to their predominant focus on the past, present and future.

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Governing policy processes and foresight

Governing policy processes and foresight

Therefore, only type C programmes are explained here in some detail. The shift in focus is reflected in the structure, too: these programmes are organised along major societal/ socio- economic concerns (e.g. health, ageing population, crime prevention in the case of the Hungarian, the first Swedish or the second UK foresight programmes; see Boxes 1-2 in Section 4.3): A new element in the underlying rationale can also be discerned, the so-called systemic failure argument: the existing institutions (written and tacit codes of behaviour, rules and norms) and organisations are not sufficient to improve quality of life and enhance competitiveness, and thus new institutions should be ‘designed’ by intense communication and co-operation among the participants. In other words, the existing gaps should be bridged by new networks, appropriate policies aimed at correcting systemic failures, and establishing or strengthening relevant organisations. A foresight programme, based on this rationale, can deliver solutions in various forms: by strengthened, re-aligned networks as ‘process’ results of the programme, as well as by policy recommendations (‘products’):

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Science Foresight to Advance European Research

Science Foresight to Advance European Research

for improving the use of bibliometrics in science foresight. Despite its many merits, the strong focus on bibliometrics for output analyses is somewhat criticised since it is an output indicator which does not fit all areas of science. As a result of this, many funders are now turning towards electronic reports as a way of obtaining a wider range of performance indicators to include in their evaluation schemes. Thus, databases of potential great value also for sci- ence foresights are now appearing all over Europe, but the respective funders are developing them locally. This means that their value as a complement to bibliometrics as a tool to benchmark research quality will be limited unless they are developed according to international standards and common data structures. The ESF MO Forum on Evaluation of Publicly Funded Research also recognises this potential problem and recommends such common standards.15 We support their recommendations and further emphasise their importance in relation to science foresight, in which the output from one institution or funder is rarely in focus but rather a whole research area.

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Tripping up the perfect

Tripping up the perfect

The current fascination in business and management literature with art and the special processes of artistic creation must also be seen in this context. For in these creative processes, people have not traditionally put repetition but the production of something new and unique at the center. They have developed tools, methods, and existential modes of relating that put the creation of something new and unique in the spotlight. Holm-Pedersen: Raffnsøe mentioned The Perfect Human, which The Five Obstructions takes as its starting point. Can you try to say a little about the motivation for making the film? You wouldn’t immediately think that there was much room for the dregs you talked about before in a film with that title.

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Corporate Future Foresight in Government: A necessity or a luxury?

Corporate Future Foresight in Government: A necessity or a luxury?

Government organizations are increasingly inclined towards shaping their futures (Borch, Dingli, & Sogaard Jorgensen, 2013; Conteh, 2014; Kuosa, 2012). Interest in integrating future foresight in the public administration sector is rising as the surrounding environment shows growing levels of uncertainty and ambiguity (Dreyer & Stangas, 2013; Marland, Walker, & Swain, 2016, United Nations Development Operations Coordination Office, n.d). However, many government organizations find themselves struggling behind as the world is changing at a faster speed (Sturesson, McIntyre, Cleal, & Jones, 2013). United Arab Emirates (UAE) is among the countries that adopted future foresight as a key focus area and therefore developed the UAE Strategy for the Future in 2015 and mandated corporate foresight activities among its

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Strategic Foresight in multinational enterprises – a case study on the Deutsche Telekom Laboratories

Strategic Foresight in multinational enterprises – a case study on the Deutsche Telekom Laboratories

For this reason, we believe it is important and valuable to identify more successful cases, broaden the scope of research and incorporate the sophisticated creativity and collaboration tools emerging today within the Web 2.0 environment. Tools that could be used include social tagging, automated and collaborative information filtering, agent- based issue analysis and the usage of virtual worlds, such as second life for consumer foresight.

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