Learning From the Expectations of Others

Jim Granato, Eran Guse and M. C. Sunny Wong ()
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Jim Granato: University of Texas

No 449, Computing in Economics and Finance 2006 from Society for Computational Economics

Abstract: The assumption of perfectly rational representative agents is now commonly questioned. This paper explores the equilibrium properties of boundedly rational heterogeneous agents. We combine an adaptive learning process in a modified cobweb model within a Stackleberg framework. We assume that there is an asymmetric information diffusion process from leading to following firms. In contrast to a simple cobweb model which has a unique REE, our model may produce multiple restricted perceptions equilibria (RPE). However, a unique and learnable RPE, under certain conditions, can exist in our model. In addition, the following firms' forecasts can confound the leading firms' forecasts -- when the following firms misinterpret information coming from the leading firms. We refer this situation to the boomerang effect. We also find that the leading firms' mean squared forecast error can be even larger than that of following firms if the proportion of following firms is sufficiently large in the market

Keywords: Adaptive Learning; Expectational Stability; Information Diffusion; Cobweb Model; Heterogeneous Expectations (search for similar items in EconPapers)
JEL-codes: C62 D84 E37 (search for similar items in EconPapers)
Date: 2006-07-04
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: LEARNING FROM THE EXPECTATIONS OF OTHERS (2008)
Working Paper: Learning from the Expectations of Others (2006)
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