Category Archives: Consensus           “Wall Street and Silicon
Valley: A Delicate Interaction,” G.-M. Angeletos, G. Lorenzoni &
A. Pavan (2012)  The Keynesian Beauty Contest – is there any
better example of an “old” concept in economics that, when read
in its original form, is just screaming out for a modern
analysis? You’ve got coordination problems, higher-order
beliefs, signal extraction about underlying fundamentals,
optimal policy response by a planner herself informationally
constrained: all of these, of course, problems that have
consumed micro theorists over the past few decades. The general
problem of irrational exuberance when we start to model things
formally, though, is that it turns out to be very difficult to
generate “irrational” actions by rational, forward-looking
agents. Angeletos et al have a very nice model that can generate
irrational-looking asset price movements even when all agents
are perfectly rational, based on the idea of information
frictions between the real and financial sector