A Behavioral Defense of Rational Expectations

Kenneth Kasa ()

Discussion Papers from Department of Economics, Simon Fraser University

Abstract: This paper studies decision making by agents who value optimism, but are unsure of their environment. As in Brunnermeier and Parker (2005), an agent’s optimism is assumed to be tempered by the decision costs it imposes. As in Hansen and Sargent (2008), an agent’s uncertainty about his environment leads him to formulate ‘robust’ decision rules. It is shown that when combined, these two considerations can lead agents to adhere to the Rational Expectations Hypothesis. Rather than being the outcome of the sophisticated statistical calculations of an impassive expected utility maximizer, Rational Expectations can instead be viewed as a useful approximation in environments where agents struggle to strike a balance between doubt and hope.

Keywords: Rational expectations; robustness (search for similar items in EconPapers)
JEL-codes: D81 D84 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-hpe, nep-mic and nep-upt
Date: 2012-03
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