A Rational Route to Randomness

William Brock and Cars H. Hommes

Econometrica, 1997, vol. 65, issue 5, 1059-1096

Abstract: Adaptively rational equilibrium is introduced, where agents adapt their beliefs by choosing from a finite set of predictor functions. Agents make a rational predictor choice, based upon a publically available performance measure such as realized past profits. This results in an adaptive belief system, where predictor choice is coupled to the market equilibrium dynamics. As a typical example, the cobweb model with rational versus naive expectations is analyzed. If the market is locally unstable and rational expectations are costly to obtain, a high intensity of choice for predictor selection leads to chaos and strange attractors.

Date: 1997
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Related works:
Chapter: A Rational Route to Randomness (2001)
Working Paper: A Rational Route to Randomness (1996)
Working Paper: Rational Routes to Randomness (1995)
Working Paper: A Rational Route to Randomness (1995)
Working Paper: Rational Routes to Randomness (1995)
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