 Beliefs asymmetry and price stability in a cobweb modelJournal of Economic Behavior & Organization, 2022, vol. 203, issue C, 401-415 Abstract: It is known that a cobweb model with heterogeneous expectations and evolutionary selection on beliefs is able to generate irregular and complex price dynamics. I show in this work that a necessary condition for such dynamics to emerge is the asymmetry in the set of available predictors over which evolutionary forces operate. If predictors are symmetric around the rational one, heterogeneous expectations aggregate up to rationality, and the unique rational expectations price is stable. If predictors are asymmetrically distributed, instead, the outcome depends on the side of the asymmetry: a prevalence of predictors that overshoot price changes leads to market stability, irrespective on any dynamics on beliefs, while a predominance of predictors anchored to past prices can be destabilizing. It is only in this last case that an evolutionary selection mechanism can give rise to complex dynamics in prices. As the distribution of beliefs depends on the set of heuristics allowed to compete in the market, the design of this set is shown to be crucial for the possible outcomes of the model. Keywords: Expectations; Heterogeneity; Heuristics; Evolutionary dynamics (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:203:y:2022:i:c:p:401-415 DOI: 10.1016/j.jebo.2022.09.017 Access Statistics for this article Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D. More articles in Journal of Economic Behavior & Organization from Elsevier |
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