Smart or stupid depends on who is your counterpart: a cobweb model with heterogeneous expectations

Guo Feng, Liu Chong and Shi Qingling ()
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Guo Feng: Shanghai University of Finance and Economics, School of Public Economics and Administration, Shanghai, China
Liu Chong: Shanghai University of Finance and Economics, School of Finance, Shanghai, China
Shi Qingling: East China Normal University, The Center for Modern Chinese City Studies, Institute of Urban Development, No. 3663 North Zhongshan Road, Shanghai, China

Studies in Nonlinear Dynamics & Econometrics, 2019, vol. 23, issue 5, 17

Abstract: We investigate the dynamics of a cobweb model with heterogeneous expectations, generalizing the famous model of Brock and Hommes (Brock, W. A., and C. H. Hommes. 1997. “A Rational Route to Randomness.” Econometrica 65 (5): 1059–1095) by adding a new predictor – periodical expectation – which predicts that the price will revert to its level two periods previously. We show that under the periodical expectation, when the agents are homogeneous, they will always make wrong predictions, whereas when the agents are heterogeneous, they may be either smart or stupid depending on their counterparts’ types. Moreover, in the cobweb framework, the periodical predictor may be a destabilizer in some cases, but a stabilizer in other cases. We also find that in the cobweb model with rational, naive and periodical expectations, under certain refined conditions, the rational predictor may be endogenously dominated by naive and periodical predictors.

Keywords: cobweb model; endogenous fluctuations; heterogeneous expectations; periodical expectations (search for similar items in EconPapers)
JEL-codes: C62 D84 E32 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1515/snde-2017-0082

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