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Working Paper
A New Way to Quantify the Effect of Uncertainty
Throckmorton, Nathaniel A.; Richter, Alexander W. (2017-05-04)
This paper develops a new way to quantify the effect of uncertainty and other higher-order moments. First, we estimate a nonlinear model using Bayesian methods with data on uncertainty, in addition to common macro time series. This key step allows us to decompose the exogenous and endogenous sources of uncertainty, calculate the effect of volatility following the cost of business cycles literature, and generate data-driven policy functions for any higherorder moment. Second, we use the Euler equation to analytically decompose consumption into several terms--expected consumption, the ex-ante ...
Working Papers , Paper 1705

Report
Barriers to household risk management: evidence from India
Cole, Shawn; Gine, Xavier; Tobacman, Jeremy; Vickery, James; Townsend, Robert M.; Topalova, Petia (2009-05-01)
Financial engineering offers the potential to significantly reduce the consumption fluctuations faced by individuals, households, and firms. Yet much of this potential remains unfulfilled. This paper studies the adoption of an innovative rainfall insurance product designed to compensate low-income Indian farmers in the event of insufficient rainfall during the primary monsoon season. We first document relatively low adoption of this new risk management product: Only 5-10 percent of households purchase the insurance, even though they overwhelmingly cite rainfall variability as their most ...
Staff Reports , Paper 373

Report
Risk Preferences at the Time of COVID-19: An Experiment with Professional Traders and Students
Cipriani, Marco; http://fedora:8080/fcrepo/rest/objects/authors/; Angrisani, Marco; Ortiz de Zarate Pina, Julen; Guarino, Antonio (2020-05-01)
We study whether the COVID-19 pandemic has impacted risk preferences, comparing the results of experiments conducted before and during the outbreak. In each experiment, we elicit risk preferences from two sample groups: professional traders and undergraduate students. We find that, on average, risk preferences have remained constant for both pools of participants. Our results suggest that the increases in risk premia observed during the pandemic are not due to changes in risk appetite; rather, they are solely due to a change in beliefs by market participants. The findings of our paper support ...
Staff Reports , Paper 927

Working Paper
Complementarity and Macroeconomic Uncertainty
Plante, Michael D.; Atkinson, Tyler; Throckmorton, Nathaniel A.; Richter, Alexander W. (2020-03-31)
Macroeconomic uncertainty—the conditional volatility of the unforecastable component of a future value of a time series—shows considerable variation in the data. A typical assumption in business cycle models is that production is Cobb-Douglas. Under that assumption, this paper shows there is usually little, if any, endogenous variation in output uncertainty, and first moment shocks have similar effects in all states of the economy. When the model departs from Cobb-Douglas production and assumes capital and labor are gross complements, first-moment shocks have state-dependent effects and ...
Working Papers , Paper 2009

Working Paper
Rational Inattention via Ignorance Equivalence
Müller-Itten, Michèle; Stangebye, Zachary; Armenter, Roc (2020-06-22)
We present a novel approach to finite Rational Inattention (RI) models based on the ignorance equivalent, a fictitious action with state-dependent payoffs that effectively summarizes the optimal learning and conditional choices. The ignorance equivalent allows us to recast the RI problem as a standard expected utility maximization over an augmented choice set called the learning-proof menu, yielding new insights regarding the behavioral implications of RI, in particular as new actions are added to the menu. Our geometric approach is also well suited to numerical methods, outperforming ...
Working Papers , Paper 20-24

Working Paper
Geometric Methods for Finite Rational Inattention
Strangebye, Zachary; Müller-Itten, Michèle; Armenter, Roc (2021-09-14)
We present a geometric approach to the finite Rational Inattention (RI) model, recasting it as a convex optimization problem with reduced dimensionality that is well-suited to numerical methods. We provide an algorithm that outperforms existing RI computation techniques in terms of both speed and accuracy. We also introduce methods to quantify the impact of numerical inaccuracy on the behavioral predictions and to produce robust predictions regarding the most frequently implemented actions.
Working Papers , Paper 21-30

Working Paper
Model Uncertainty and the Pricing of Hurricane Risk in Florida
Heitfield, Erik (2026-03-23)
This paper examines how model uncertainty affects the price of homeowners insurance in Florida. We use unique data on expected loss rate projections from seven hurricane risk models approved by regulators for use in Florida property insurance rate filings to quantify model uncertainty. By combining these data with newly published information on local property insurance markets, we are able to empirically test the relationship between model uncertainty and insurance premiums across Florida ZIP codes and over time. Controlling for confounding variables and time-invariant latent factors that may ...
Finance and Economics Discussion Series , Paper 2026-016

Working Paper
Rational Inattention via Ignorance Equivalence
Armenter, Roc; Strangebye, Zachary; Müller-Itten, Michèle (2021-09-03)
We introduce the concept of the ignorance equivalent to effectively summarize the payoff possibilities in a finite Rational Inattention problem. The ignorance equivalent is a unique fictitious action that is weakly preferable to all existing learning strategies and yet generates no new profitable learning opportunities when added to the menu of choices. We fully characterize the relationship between the ignorance equivalent and the optimal learning strategies. Agents with heterogeneous priors self-select their own ignorance equivalent, which gives rise to an expected-utility analogue of the ...
Working Papers , Paper 21-29

Working Paper
Extended Loan Terms and Auto Loan Default Risk
Cordell, Lawrence R.; An, Xudong; Tang, Sharon (2020-05-20)
A salient feature of the $1.2 trillion auto-loan market is the extension of loan maturity terms in recentyears. Using a large, national sample of auto loans from the entire auto market, we find that the default rates on six- and seven-year loans are multiple times that of shorter five-year term loans. Most of the default risk difference is due to borrower risks associated with longer-term loans, as those longer-term auto borrowers are more credit and liquidity constrained. We also find borrowers’ loan-term choice to be endogenous and that the endogeneity bias is substantial in conventional ...
Working Papers , Paper 20-18

Discussion Paper
Recent Shifts Seen in Consumers’ Public Policy Expectations
Delehanty, Joseph; Koşar, Gizem; Van der Klaauw, Wilbert (2025-04-11)
In this post we examine changes in households’ beliefs following the release of the December 2024 SCE Public Policy Survey, finding large shifts in consumer expectations about future changes in fiscal policy. Households assign higher likelihoods to a variety of tax cuts and to reductions in a range of transfer programs, while they assign lower likelihoods to tax hikes and expansions in entitlement programs. We do not find these sharp changes translate into meaningful shifts in median households’ near-term expectations about the evolution of the overall economy, nor do they appear to have ...
Liberty Street Economics , Paper 20250411

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