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A Behavioral Defense of Rational Expectations

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Abstract

This paper studies decision making by agents who value optimism, but are unsure of their environment. As in Brunnermeier and Parker (2005), an agent’s optimism is assumed to be tempered by the decision costs it imposes. As in Hansen and Sargent (2008), an agent’s uncertainty about his environment leads him to formulate ‘robust’ decision rules. It is shown that when combined, these two considerations can lead agents to adhere to the Rational Expectations Hypothesis. Rather than being the outcome of the sophisticated statistical calculations of an impassive expected utility maximizer, Rational Expectations can instead be viewed as a useful approximation in environments where agents struggle to strike a balance between doubt and hope.

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File URL: http://www.sfu.ca/econ-research/RePEc/sfu/sfudps/dp12-05.pdf
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Bibliographic Info

Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp12-05.

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Length: 11
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:sfu:sfudps:dp12-05

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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Phone: (778)782-3508
Fax: (778)782-5944
Web page: http://www.sfu.ca/economics.html
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Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Web: http://www.sfu.ca/economics/research/publications.html

Related research

Keywords: Rational expectations; robustness;

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  1. Tomasz Strzalecki, 2011. "Axiomatic Foundations of Multiplier Preferences," Levine's Working Paper Archive 786969000000000126, David K. Levine.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Rational expectations as an optimal approximation
    by Economic Logician in Economic Logic on 2012-04-25 14:04:00
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Cited by:
  1. Mejía Cubillos, Javier, 2012. "Libertad y desempeño económico
    [Freedom and economic performance]
    ," MPRA Paper 37939, University Library of Munich, Germany.

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