Rational vs. Irrational Beliefs in a Complex World

Gregor Boehl and Cars Hommes

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: Can boundedly rational agents survive competition with fully rational agents? We develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational back- ward looking agents and evolving market shares depending on their relative performance. Our novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dy- namics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamen- tal value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact, and their interaction produces complex endogenous bubble and crashes, without any exogenous shocks.

Keywords: Heterogeneous agents; trend-extrapolation; bubbles; numerical solution method (search for similar items in EconPapers)
JEL-codes: C63 E03 E32 E44 E51 (search for similar items in EconPapers)
Pages: 43
Date: 2021-04
New Economics Papers: this item is included in nep-mac, nep-ore and nep-upt
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Related works:
Journal Article: Rational vs. irrational beliefs in a complex world (2025)
Working Paper: Rational vs. irrational beliefs in a complex world (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2021_287

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