##common.pageHeaderLogo.altText##

Articles

Vol. 14 No. 50 (2019)

Revisiting Birnbaum-Chávez and Diamond-Dybvigmodels on bank runs: do runs depend only on economicfundamentals or also on psychological factors?

  • Erick Romero-Ramírez
  • Francisco Venegas-Martínez
  • José Carlos Trejo-García
DOI:
https://doi.org/10.29201/ktv1dz87
Published
June 28, 2019

Abstract

This paper is aimed at revisiting and extending Birnbaum-Chávez’s (1997) y Diamond-Dybvig’s (1983) models by incorporating new psychological parameters. The proposed  extension is useful to show that the level of optimism/pessimism and the risk  aversion of individuals, as well as the importance (or weight) that individuals  assign to the possible outcomes of the economy can make the suspension of  convertibility, the bank deposit insurance and the government tax preventive policy  insufficient mechanisms to avoid bank runs.

References

  1. Allais, Maurice (1953). “Le Comportement de l´Homme Rationnel Devant le Risqué, Critique des Postulats et Axioms de l´École Américane”. Econometrica, 21(4): 503-46.
  2. Babcock, Linda, and George Loewenstein (1997). “Explaining Bargaining Impasse: The Role of Self-serving Biases”. Journal of Economic Perspectives, 11(1): 109-26.
  3. Bernoulli, Daniel (1954) [1738]). “Exposition of a New Theory on the Measurement of Risk”. Econometrica, 22(1): 23-26.
  4. Blavatskyy, Pablo (2005). “Back to the St. Petersburg Paradox?” Management Science, 51(4): 677-678.
  5. Birnbaum, Michel H. (1997). “Violations of Monotonicity in Judgment and Decision
  6. Making”. in A. A. J. Marley (ed.), Choice, decision, and measurement: Essays in honor of R. Duncan Luce, 73-100. Mahwah, NJ: Erlbaum.
  7. Birnbaum, Michel H. (1999). “Paradoxes of Allais, stochastic dominance, and decision weights”, in Decision Science and Technology: Reflections on the Contributions
  8. of Ward Edwards, eds. Shanteau J., Mellers B. A., Schum D. A., editors. (Norwell, MA: Kluwer Academic Publishers), 27-52.
  9. Birnbaum, Michel H. (2004). “Causes of Allais Common Consequence Paradoxes: An Experimental Dissection”. Journal of Mathematical Psychology, 48(2): 87–106.
  10. Birnbaum, Michel H. (2008). “New Paradoxes of Risky Decision Making”. Psychology Review, 115(2): 453–501.
  11. Birnbaum, Michel H. and Jeffrey Bahra (2007). “Gain-Loss Separability and Coalescing in Risky Decision Making”. Management Science, 53(6): 1016-1028.
  12. Birnbaum, Michel H. and Alfredo Chavez (1997). “Tests of Theories of Decision Making: Violations of Branch Independence and Distribution Independence.” Organizational Behavior and Human Decision Processes, 71(2): 161-94.
  13. Camerer, Colin F.; George Loewenstein and Matthew Rabin (2004). “Advances in Behavioral Economics”. Princeton, N.J.: Princeton University Press.
  14. Cenci, Marissa; Massimiliano Corradini; Alberto Feduzi and Andrea Gheno (2015). “Half-full or half-empty? A Model of Decision Making under Risk”. Journal of Mathematical Psychology. 68-69(1-6): 1-6.
  15. Cooper, Russell and Thomas Ross (1998). “Bank Runs: Liquidity Costs and Investment Distortions”. Journal of Monetary Economics, 41(1): 27-38.
  16. Dewatripont, Mathias and Jean Tirole (1994). “The Prudential Regulation of Banks”. MIT Press.
  17. Diamond, Douglas W. (2005). “Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model”. Federal Reserve Bank of Richmond. Economic Quarterly, 93(2): 189-200.
  18. Diamond, Douglas W. and Philip H. Dybvig (1983). “Bank Runs, Deposit Insurance, and Liquidity”. Journal of Political Economy, 91(5): 401-19.
  19. Ennis, Huberto M. (2003). “Economic Fundamentals and Bank Runs”. Federal Reserve Bank of Richmond. Economic Quarterly, 89(2): 55-71.
  20. Ennis, Humberto and Todd Keister (2003). “Economic Growth, Liquidity, and Bank Runs”. Journal of Economic Literature, 109(2): 220-245.
  21. Friedman, Milton, and Anna Schwartz (1963). A Monetary History of the United States 1867-1960. Princeton, N.J.: Princeton University Press.
  22. Friedman, Milton (1980). La Libertad de elegir. España: Editorial Orbis.
  23. Gibbons, Robert (2011). Un Primer Curso de Teoría de Juegos. Barcelona, España: Antoni Bosch.
  24. Goldstein, Itay and Ady Pauzner (2005). “Demand Deposit Contracts and the Probability of Bank Runs.” Journal of Finance 60(3): 1293-1328.
  25. Hogarth, Robin M. and Hillel J. Einhorn (1992). “Order Effects in Belief Updating: The Belief-Adjustment Model.” Cognitive Psychology. 24(1): 1-55.
  26. Hogarth, Robin M. and Melvin W. Reader (1987). Rational Choice: The Contrast between Economics and Psychology. Chicago: University of Chicago Press.
  27. Hopfensitz, A. (2006). The Role of Affect in Reciprocity and Risk Taking, PhD. Dissertation. University of Amsterdam. Netherlands.
  28. Kahneman, Daniel and Amos Tversky (1974). “Judgment under Uncertainty: Heuristics and Biases”. Science, 185(4157): 1124-1131.
  29. ___ (1979). “Prospect Theory: An Analysis of Decision under Risk.” Econometrica, 47(2): 263-91.
  30. ___ (1981). “The Framing of Decisions and the Psychology of Choice.” Science, 211(4481): 453-58.
  31. ___ (1984). “Choices, Values, and Frames.” American Psychologist, 34(4): 342-350.
  32. Kahneman, Daniel and Shane Frederick (2002). “Representativeness Revisited: Attribution Substitution in Intuitive Judgment”. Heuristic of Intuitive Judgment: Extension and Applications. New York: Cambridge University Press.
  33. Levy, Moshe, and Haim Levy (2002). “Prospect Theory: Much ado about nothing”. Management Science, 48(10): 1334-1349.
  34. Mattana, Elena and Ettore Panetti (2014). “A Dynamic Quantitative Macroeconomic Model of Bank Runs”. Banco de Portugal Working Paper núm., 2014-13.
  35. Neumann, John and Oskar Morgenstern (1947). “The Theory of Games and Economic Behavior”. 2nd ed. Princeton: Princeton University Press.
  36. Shell, Karl and Bruce Smith (1992). “Sunspot Equilibrium.” The New Palgrave Dictionary of Money and Finance, 3: 601-7.
  37. Silva, Nancy (2008). Deposit Insurance, Moral Hazard and the Risk of Runs. Central Bank of Chile Working Papers, 474: 1-40.
  38. Simon, Herbert A. (1955). “A Behavioral Model of Rational Choice.” The Quarterly Journal of Economics, 69(1): 99-118.
  39. Smith, Adam (1759, [1978]). “Teoría de los Sentimientos Morales”. México: Fondo de Cultura Económica.
  40. Starmer, Chris (2000). “Developments in Non-Expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk.” Journal of Economic Literature, 38(2): 332-82.
  41. Venegas-Martínez, Francisco (2008). “Riesgos financieros y económicos”: Productos derivados y decisiones económicas bajo incertidumbre, 2da., edición. México. Cengage Learning.
  42. Wu, George and Markle, Alex B. (2008). “An Empirical Test of Gain-Loss Separability in Prospect Theory.” Management Science, 54(7), 1322-1335.

Most read articles by the same author(s)