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Behavioural Heterogeneity under Evolutionary Pressure: Macroeconomic Implications of Costly Optimisation

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Author Info
Sethi, Rajiv
Franke, Reiner

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Abstract

A model is developed in which a continuum of agents makes interdependent output decisions in a stochastic environment characterized by strategic complementarity. Two groups are distinguished: naive agents follow a costless adaptive expectations rule, while sophisticated agents incur an optimization cost to achieve self-fulfilling expectations. The paper studies the dynamics generated as the population composition evolves under pressure of differential payoffs. Sophisticated agents are favored if optimization is cheap or the stochastic environment highly variable but naive agents generally persist. A higher long-run share of sophisticated agents is associated with greater output variability and low output persistence. Copyright 1995 by Royal Economic Society.

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Publisher Info
Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 105 (1995)
Issue (Month): 430 (May)
Pages: 583-600
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Handle: RePEc:ecj:econjl:v:105:y:1995:i:430:p:583-600

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  1. Eran Guse, 2004. "Learning with Heterogeneous Expectations in an Evolutionary World," Computing in Economics and Finance 2004 99, Society for Computational Economics. [Downloadable!]
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  2. Seonghwan Oh & Michael Waldman, 2005. "The Index of Leading Economic Indicators as a Source of Expectational Shocks," Eastern Economic Journal, Eastern Economic Association, vol. 31(1), pages 75-95, Winter. [Downloadable!]
  3. William Brock & Cars Hommes & Florian Wagener, 2006. "More Hedging Instruments may destablize Markets," Tinbergen Institute Discussion Papers 06-080/1, Tinbergen Institute, revised 30 Apr 2008. [Downloadable!]
    Other versions:
  4. Antulio N. Bomfim, 1996. ""Forecasting the forecasts of others." Expectational heterogeneity and aggregate dynamics," Finance and Economics Discussion Series 96-41, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  5. Georges Prat & Remzi Uctum, 2009. "Modelling oil price expectations: evidence from survey data," EconomiX Working Papers 2009-28, University of Paris West - Nanterre la Défense, EconomiX. [Downloadable!]
  6. David Goldbaum, 2004. "On the Possibility of Informationally Efficient Markets: Part b," Working Papers Rutgers University, Newark 2004-011, Department of Economics, Rutgers University, Newark. [Downloadable!]
  7. Antulio N. Bomfim & Francis X. Diebold, 1996. "Bounded Rationality and Strategic Complementarity in a Macroeconomic Model: Policy Effects, Persistence and Multipliers," NBER Working Papers 5482, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. David Goldbaum, 2004. "On the Possibility of Informationally Efficient Markets," Working Papers Rutgers University, Newark 2004-009, Department of Economics, Rutgers University, Newark. [Downloadable!]
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  9. Bill Branch & George W. Evans, 2003. "Intrinsic Heterogeneity in Expectation Formation," University of Oregon Economics Department Working Papers 2003-32, University of Oregon Economics Department, revised 04 Oct 2004. [Downloadable!]
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