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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.

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Paper provided by Department of Economics, Simon Fraser University in its series Discussion Papers with number dp12-05.

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Length: 11
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:sfu:sfudps:dp12-05
Contact details of provider: Postal: Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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Order Information: Postal: Working Paper Coordinator, Department of Economics, Simon Fraser University, 8888 University Drive, Burnaby, BC, V5A 1S6, Canada
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  1. Tomasz Strzalecki, . "Axiomatic Foundations of Multiplier Preferences," Working Paper 8239, Harvard University OpenScholar.
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