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Learning From the Expectations of Others

Author Info

Listed author(s):
  • Jim Granato

    (University of Texas)

  • Eran Guse

    (University of Cambridge)

  • Sunny Wong

    (Southern Mississippi University)

Abstract

The assumption of perfectly rational representative agents is now commonly questioned. This paper explores the equilibrium properties of boundedly rational heterogeneous agents. We combine an adaptive learning process in a modified cobweb model within a Stackleberg framework. We assume that there is an asymmetric information diffusion process from leading to following firms. In contrast to a simple cobweb model which has a unique REE, our model may produce multiple restricted perceptions equilibria (RPE). However, a unique and learnable RPE, under certain conditions, can exist in our model. In addition, the following firms' forecasts can confound the leading firms' forecasts -- when the following firms misinterpret information coming from the leading firms. We refer this situation to the boomerang effect. We also find that the leading firms' mean squared forecast error can be even larger than that of following firms if the proportion of following firms is sufficiently large in the market

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 449.

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Date of creation: 04 Jul 2006
Handle: RePEc:sce:scecfa:449
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Keywords: Adaptive Learning; Expectational Stability; Information Diffusion; Cobweb Model; Heterogeneous Expectations;

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Find related papers by JEL classification:
  • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
  • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
  • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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  1. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  2. Guse, Eran A., 2008. "Learning in a misspecified multivariate self-referential linear stochastic model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1517-1542, May.
  3. Seppo Honkapohja & Kaushik Mitra, 2006. "Learning Stability in Economies with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 284-309, April.
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  19. Evans, George W & Honkapohja, Seppo, 1992. "On the Robustness of Bubbles in Linear RE Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(1), pages 1-14, February.
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Cited by:

  1. Michele Berardi, 2009. "Monetary Policy with Heterogeneous and Misspecified Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 79-100, 02.
  2. Muto, Ichiro, 2011. "Monetary policy and learning from the central bank's forecast," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 52-66, January.
  3. Cone, Thomas E., 2006. "Learning with limited bandwidth and attention to others' learning," Economics Letters, Elsevier, vol. 93(1), pages 132-136, October.
  4. Eran Guse & Sunny M.C. Wong, 2011. "Adaptive Learning and Information Diffusion," Working Papers 11-04, Department of Economics, West Virginia University.

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