Heterogeneous beliefs and approximately self-fulfilling outcomes

Gabriel Desgranges and Sayantan Ghosal

Working Papers from Business School - Economics, University of Glasgow

Abstract: When are heterogenous beliefs compatible with equilibrium and if not, which non-equilibrium outcomes do they lead to? In this paper, we examine the conditions under which heterogenous beliefs lead to approximately self-fulfilling outcomes consistent with all that is commonly known by each agent via an iterative elimination process. We develop a formal definition of approximately self-fulfilling outcomes, p-consensus, and an associated, continuous measure of the degree of stability of equilibrium, p-stability. Applying our concepts to intertemporal trade in a two period economy, we examine how heterogenous beliefs and heterogenous preferences interact to create to asset price bubbles.

Keywords: p-consensus; p-stability; equilibrium; rationalizability; heterogeneous; beliefs; preferences; games; markets (search for similar items in EconPapers)
JEL-codes: C70 D84 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-evo and nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:gla:glaewp:2021_07

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