Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria

Cars Hommes

No 13-204/II, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This discussion paper led to a publication in the 'Review of Behavioral Economics , 1 (1-2), 75-97.

Rational expectations assumes perfect, model consistency between beliefs and market realizations. Here we discuss behaviorally rational expectations, characterized by an observable, parsimonious and intuitive form of consistency between beliefs and realizations. We discuss three case-studies. Firstly, a New Keynesian macro model with a representative agent learning an optimal, but misspecified, AR(1) rule to forecast inflation consistent with observed sample mean and first-order autocorrelations. Secondly, an asset pricing model with heterogeneous expectations and agents switching between a mean-reverting fundamental rule and a trend-following rule, based upon their past performance. The third example concerns learning-to-forecast laboratory experiments, where under positive feedback individuals coordinate expectations on non-rational, almost self-fulling equilibria with persistent price fluctuations very diff erent from rational equilibria.

Keywords: Expectation feedback; self-ful lling beliefs; heuristic switching model; experimental economics (search for similar items in EconPapers)
JEL-codes: C92 D83 D84 E32 (search for similar items in EconPapers)
Date: 2013-12-16
New Economics Papers: this item is included in nep-cbe, nep-exp and nep-mac
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Related works:
Journal Article: Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria (2014)
Working Paper: Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20130204

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