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On the Evolutionary Stability of Rational Expectations

  • William R. Parke

    ()

    (Department of Economics, University of North Carolina)

  • George A. Waters

    ()

    (Department of Economics, Illinois State University)

Evolutionary game theory provides a fresh perspective on the prospects that agents with heterogeneous expectations might eventually come to agree on a single expectation corresponding to the efficient markets hypothesis. We establish conditions where agreement on a unique forecast is stable, but also show that persistent heterogeneous expectations can arise if those conditions do not hold. The critical element is the degree of curvature in payoff weighting functions agents use to value forecasting performance. We illustrate our results in the context of an asset pricing model where a martingale solution competes with the fundamental solution for agents’ attention.

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File URL: http://economics.illinoisstate.edu/RePec/Papers/OESRE7-11.pdf
File Function: First version, 2011
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Paper provided by Illinois State University, Department of Economics in its series Working Paper Series with number 20111002.

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Length: 30 pages
Date of creation: Oct 2011
Date of revision:
Handle: RePEc:ils:wpaper:20111002
Contact details of provider: Web page: http://economics.illinoisstate.edu

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