A Behavioral Defense of Rational Expectations
This 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.
|Date of creation:||Mar 2012|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.sfu.ca/economics.html
More information through EDIRC
|Order Information:|| Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada|
Web: http://www.sfu.ca/economics/research/publications.html Email:
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,"
Econometric Society, vol. 79(1), pages 47-73, 01.
When requesting a correction, please mention this item's handle: RePEc:sfu:sfudps:dp12-05. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Working Paper Coordinator)
If references are entirely missing, you can add them using this form.