Divergence of Opinion in Complete Markets

Abstract

We consider an Arrow-Debreu model with different subjective probabilities. In general asset prices will depend only on aggregate consumption and the distribution of subjective probabilities in each state of nature. If all agents have identical preferences then an asset with 'more dispersed' subjective probabilities will have a lower price than an asset with less dispersed subjective probabilities if risk aversion does not decline too rapidly. It seems likely that this condition is met in practice so that increased dispersion of beliefs will generally be associated with reduced asset prices in a given Arrow-Debreu equilibrium.