Heterogeneous Subjective Moments and Price Dynamics

Differential expectations have long been presumed necessary for the existence of speculative markets. At an empirical level, considerable evidence further suggests that agents may not hold rational expectations. The representative agent hypothesis is disputable on theoretical grounds because it is not consistent with observed trading behavior and the existence of markets. It has been favored in the past due to intractability of aggregation associated with heterogeneity. Now, due to improved computing technology, explicitly aggregation problems are becoming tractable. Heterogeneous expectations must be considered seriously in price analysis because they bring our models one step closer to reality.