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A consistent route to randomness

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  • Dudek, Maciej K.

Abstract

Fully rational agents are allowed to optimize over expectations formation technologies in an environment where it is costly to collect and process information. It is shown in a general equilibrium framework that optimization over expectations by rational and forward-oriented agents can lead to endogenous instability. Specifically, we illustrate that resulting equilibria can be both chaotic and self-consistent with the distribution of agents' expected forecasting errors coinciding with the actual errors implied by the endogenous dynamic process. Moreover, we show that the equilibrium dynamics, while being purely deterministic, need not be distinguishable from stochastic dynamics to an outside rational observer.

Suggested Citation

  • Dudek, Maciej K., 2010. "A consistent route to randomness," Journal of Economic Theory, Elsevier, vol. 145(1), pages 354-381, January.
  • Handle: RePEc:eee:jetheo:v:145:y:2010:i:1:p:354-381
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    References listed on IDEAS

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    Cited by:

    1. Orlando Gomes, 2015. "Sentiment Cyclicality," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 9(2), pages 104-134, December.
    2. Gomes, Orlando, 2012. "Rational thinking under costly information—Macroeconomic implications," Economics Letters, Elsevier, vol. 115(3), pages 427-430.
    3. repec:eee:mateco:v:74:y:2018:i:c:p:46-55 is not listed on IDEAS
    4. Ali Khan, M. & Piazza, Adriana, 2011. "Optimal cyclicity and chaos in the 2-sector RSS model: An anything-goes construction," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 397-417.
    5. Dudek, Maciej K., 2014. "Living in an imaginary world that looks real," Journal of Economic Dynamics and Control, Elsevier, vol. 41(C), pages 209-223.

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