Working Paper: CEPR ID: DP17541
Authors: Jakub Steiner; Arthur Robson; Larry Samuelson
Abstract: This paper examines connections between stochastic growth and decision problems. We use tools from the theory of large deviations to show that wishful thinking decision problems areequivalent to utility maximization problems, both of which are equivalent to growth maximization under idiosyncratic risk. Rational inattention problems are equivalent to growth-optimal portfolio problems, both of which are equivalent to growth maximization under aggregate risk. Stochastic growth generates extreme inequality, with nearly all wealth eventually held by those who happen to have faced an empirical distribution of shocks that matches the solution to the wishful thinking or rational inattention problem.
Keywords: Stochastic Growth; Rational Inattention; Wishful Thinking; Kelly Criterion; Large Deviations
JEL Codes: D8; D9; D63; N1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Expected utility maximization (D81) | Wishful thinking (D84) |
| Rational inattention (D80) | Growth-optimal portfolio (G11) |
| Stochastic growth (O49) | Extreme wealth concentration (D31) |
| Decision theory (C44) | Wealth accumulation under stochastic growth (E21) |