Rational vs. irrational beliefs in a complex world
Gregor Böhl and
Cars Hommes ()
No 156, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)
Can boundedly rational agents survive competition with fully rational agents? The authors develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational backward looking agents and evolving market shares depending on their relative performance. Their novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dynamics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamental 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)
New Economics Papers: this item is included in nep-cmp, nep-cwa, nep-mac, nep-ore and nep-upt
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Working Paper: Rational vs. Irrational Beliefs in a Complex World (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:imfswp:156
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