An external shock caused by an extraordinary and unpredictable effect, a “black swan” like COVID-19, is analyzed. It implies shift of endowment in financial markets, its effects on economic inequality, deepening total income. Theoretical models are proposed, where the public sector seeks alternatives to lockdown, allowing self-regulation economy, taxing capital or seeking joint policies with ot...

Commentary on The neurobiology of reference-dependent value computation. Would you be willing to pay more for a new television the same day you bought a new house? Would you be more likely to purchase that television if it was marked on sale? Most individuals respond affi rmatively to questions of this form, likely because they use a " reference point " to help with evaluating their options. A ...

The benefits of endowment destruction documented by Ljungqvist and Uhlig (2014), and the related possibility that consumption can lower habits, are fragile. Both issues result from a particular way of discretely approximating the underlying continuous-time model, or of adapting it to jumps. Other ways of calculating the discrete-time approximation or extending the model to jumps easily overturn...

Many laboratory experiments show that people are often altruistic or care for fairness. We present data that reveal a darker side of human nature. We introduce the joy-of-destruction game. Two players each receive an endowment and simultaneously decide on how much of the other player’s endowment to destroy. Subjects play this game repeatedly. In one treatment, subjects can hide their destructio...

In an economy with a continuum of individuals, each individual has a stochastic, continuously evolving endowment process. Individuals are risk-averse and would therefore like to insure their endowment processes. It is feasible to obtain insurance by pooling endowments across individuals because the processes are mutually independent. We characterize the payoff from an insurance contracting sche...

We examine the optimal portfolio selection problem for a single agent who receives a unhedgeable endowment. The agent wishes to optimize his/her log-utility derived from his/her terminal wealth. We do not solve this problem analytically but rigorously prove that there exists a unique optimal portfolio strategy. We present a recursive computational algorithm which produces a sequence of portfoli...

We use the revealed preference method to derive a model of individual decision making when one’s endowment provides a reference point that may influence her choices. This model generalizes the classical rational choice model. While the latter views choice as a consequence of “utility maximization,” the model proposed here views choice as arising from “mentally constrained utility maximization,”...