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Does eductive stability imply evolutionary stability?

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  • Hommes, C.H.
  • Wagener, F.O.O.

    ()
    (Universiteit van Amsterdam)

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

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 03-04.

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Date of creation: 2003
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Handle: RePEc:ams:ndfwpp:03-04

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
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Web page: http://www.fee.uva.nl/cendef/
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  1. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  2. Cees Diks & Roy van der Weide, 2003. "Herding, A-synchronous Updating and Heterogeneity in Memory in a CBS," Tinbergen Institute Discussion Papers 03-103/1, Tinbergen Institute.
  3. Milgrom, Paul & Roberts, John, 1990. "Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities," Econometrica, Econometric Society, vol. 58(6), pages 1255-77, November.
  4. Cars Hommes & Florian Wagener, 2008. "Complex Evolutionary Systems in Behavioral Finance," Tinbergen Institute Discussion Papers 08-054/1, Tinbergen Institute.
  5. 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.
  6. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.
  7. 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.
  8. 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.
  9. Guesnerie, R., 1999. "Anchoring Economic Predictions in Common Knowledge," DELTA Working Papers 1999-06, DELTA (Ecole normale supérieure).
  10. Binmore, Ken, 1987. "Modeling Rational Players: Part I," Economics and Philosophy, Cambridge University Press, vol. 3(02), pages 179-214, October.
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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. Hommes, C.H., 2010. "The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab," CeNDEF Working Papers 10-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Nicolò Pecora & Alessandro Spelta, 2013. "Macroeconomic Stability and Heterogeneous Expectations," DEM Working Papers Series 037, University of Pavia, Department of Economics and Management.
  4. 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).
  5. 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.
  6. 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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