On the Evolutionary Stability of Rational Expectations

William Parke () and George Waters
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William Parke: Department of Economics, University of North Carolina

No 20111002, Working Paper Series from Illinois State University, Department of Economics

Abstract: Evolutionary game theory provides a fresh perspective on the prospects that agents with heterogeneous expectations might eventually come to agree on a single expectation corresponding to the efficient markets hypothesis. We establish conditions where agreement on a unique forecast is stable, but also show that persistent heterogeneous expectations can arise if those conditions do not hold. The critical element is the degree of curvature in payoff weighting functions agents use to value forecasting performance. We illustrate our results in the context of an asset pricing model where a martingale solution competes with the fundamental solution for agents’ attention.

Keywords: rational expectations; hetergeneous expectations; evolutionary game theory; asset pricing; efficient markets hypothesis (search for similar items in EconPapers)
JEL-codes: C22 C73 D84 G12 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2011-10
New Economics Papers: this item is included in nep-cba, nep-evo, nep-gth and nep-neu
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Journal Article: ON THE EVOLUTIONARY STABILITY OF RATIONAL EXPECTATIONS (2014)
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