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Does eductive stability imply evolutionary stability?

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  • Hommes, Cars
  • Wagener, Florian

Abstract

This note presents a simple example of a model in which the unique rational expectations (RE) steady state equilibrium is eductively stable in the sense of Guesnerie (2002), but where evolutionary learning, as introduced in Brock and Hommes (1997), does not necessarily converge to the RE steady state price. The example is a Muthian cobweb model where producers have heterogeneous expectations and select forecasting strategies based upon recent realized profits. By means of a simple three types example we show that a locally stable RE fundamental steady state may co-exists with a locally stable two-cycle. We also study the Muthian model with a large number of different producer types, and investigate conditions under which an evolutionary adaptive learning process based upon recent realized profits enforces global convergence to the stable RE steady state and when persistent periodic price fluctuations can arise.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 75 (2010)
Issue (Month): 1 (July)
Pages: 25-39

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Handle: RePEc:eee:jeborg:v:75:y:2010:i:1:p:25-39

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Web page: http://www.elsevier.com/locate/jebo

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Keywords: Muthian cobweb model Evolutionary learning Adaptive learning Large type limit;

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References

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  1. Cars Hommes & Florian Wagener, 2008. "Complex Evolutionary Systems in Behavioral Finance," Tinbergen Institute Discussion Papers 08-054/1, Tinbergen Institute.
  2. Brock, W.A., 1995. "A Rational Route to Randomness," Working papers 9530, Wisconsin Madison - Social Systems.
  3. Diks, Cees & van der Weide, Roy, 2005. "Herding, a-synchronous updating and heterogeneity in memory in a CBS," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 741-763, April.
  4. Binmore, Ken, 1987. "Modeling Rational Players: Part I," Economics and Philosophy, Cambridge University Press, vol. 3(02), pages 179-214, October.
  5. Guesnerie, Roger, 1992. "An Exploration of the Eductive Justifications of the Rational-Expectations Hypothesis," American Economic Review, American Economic Association, vol. 82(5), pages 1254-78, December.
  6. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  7. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
  8. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2002. "Evolutionary dynamics in markets with many trader types," CeNDEF Working Papers 02-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  9. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  10. Anufriev, M. & Assenza, T. & Hommes, C.H. & Massaro, D., 2008. "Interest Rate Rules with Heterogeneous Expectations," CeNDEF Working Papers 08-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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Cited by:
  1. Gabriel Desgranges & Stéphane Gauthier, 2014. "Rationalizability and Efficiency in an Asymmetric Cournot Oligopoly," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00975002, HAL.
  2. Nicolò Pecora & Alessandro Spelta, 2013. "Macroeconomic Stability and Heterogeneous Expectations," DEM Working Papers Series 037, University of Pavia, Department of Economics and Management.
  3. Bao, Te & Duffy, John, 2014. "Adaptive vs. eductive learning: Theory and evidence," Research Report 14002-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  4. Anufriev, M. & Assenza, T. & Hommes, C.H. & Massaro, D., 2008. "Interest Rate Rules with Heterogeneous Expectations," CeNDEF Working Papers 08-08, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  5. George W. Evans & Roger Guesnerie & Bruce Mcgough, 2010. "Eductive stability in real business cycle models," PSE Working Papers halshs-00565011, HAL.
  6. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
  7. Mikhail Anufriev & Tiziana Assenza & Cars Hommes & Domenico Massaro, 0000. "Interest Rate Rules and Macroeconomic Stability under Heterogeneous Expectations," Tinbergen Institute Discussion Papers 09-040/1, Tinbergen Institute.

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