The equilibrium prices in asset markets, as stated by Keynes (1930): “…will be ﬁxed at the point at which the sales of the bears and the purchases of the bulls are balanced.” We propose a descriptive theory of ﬁnance explicating Keynes’ claim that the prices of assets today equilibrate the optimism and pessimism of bulls and bears regarding the payoﬀs of assets tomorrow. This equilibration of optimistic and pessimistic beliefs of investors is a consequence of investors maximizing Keynesian utilities subject to budget constraints deﬁned by market prices and investor’s income. The set of Keynesian utilities is a new class of non-expected utility functions representing the preferences of investors for optimism or pessimism, deﬁned as the composition of the investor’s preferences for risk and her preferences for ambiguity. Bulls and bears are deﬁned respectively as optimistic and pessimistic investors. (Ir)rational exuberance is an intrinsic property of asset markets where bulls and bears are endowed with Keynesian utilities.
Bracha, Anat and Brown, Donald J., "(Ir)Rational Exuberance: Optimism, Ambiguity and Risk" (2013). Cowles Foundation Discussion Papers. 2279.