A Behavioral Defense of Rational Expectations
AbstractThis 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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Bibliographic InfoPaper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp12-05.
Date of creation: Mar 2012
Date of revision:
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Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Web page: http://www.sfu.ca/economics.html
More information through EDIRC
Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-04-10 (All new papers)
- NEP-CBE-2012-04-10 (Cognitive & Behavioural Economics)
- NEP-EVO-2012-04-10 (Evolutionary Economics)
- NEP-HPE-2012-04-10 (History & Philosophy of Economics)
- NEP-MIC-2012-04-10 (Microeconomics)
- NEP-UPT-2012-04-10 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Tomasz Strzalecki, 2011.
"Axiomatic Foundations of Multiplier Preferences,"
Levine's Working Paper Archive
786969000000000126, David K. Levine.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Rational expectations as an optimal approximation
by Economic Logician in Economic Logic on 2012-04-25 14:04:00
- Mejía Cubillos, Javier, 2012.
"Libertad y desempeño económico
[Freedom and economic performance]," MPRA Paper 37939, University Library of Munich, Germany.
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