Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations
AbstractWe examine the role of expectations in a model aimed to explain financial fluctuations. The model restates the core of Minsky's financial instability hypothesis, focusing on the role of expectations. The hypotheses concerning the process of formation and revision of expectations are discussed in light of Keynes's epistemological view of the behavior of boundedly rational agents under conditions of strong uncertainty. These hypotheses are formalized by drawing on recent advances in complex dynamics, decision theory and behavioral economics. We show that widespread use of extrapolative expectations by economic agents produces a high degree of financial instability that may lead to a serious financial crisis, and that the use by economic agents of a mix of extrapolative and regressive expectations reduces the dynamical instability of the model but may give rise to complex dynamics.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Behavior & Organization.
Volume (Year): 83 (2012)
Issue (Month): 3 ()
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Web page: http://www.elsevier.com/locate/jebo
Financial instability; Heterogeneous expectations; Extrapolative expectations; Regressive expectations; Complex dynamics;
Other versions of this item:
- Serena Sordi & Alessandro Vercelli, 2010. "Heterogeneous expectations and strong uncertainty in a Minskyian model of financial fluctuations," Department of Economic Policy, Finance and Development (DEPFID) University of Siena 1010, Department of Economic Policy, Finance and Development (DEPFID), University of Siena.
- G01 - Financial Economics - - General - - - Financial Crises
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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