IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Rational Routes to Randomness

  • William A. Brock
  • Cars H. Hommes

We introduce the concept of Adaptively Rational Equilibrium (A.R.E.) where agents base decisions upon predictions of future values of endogenous variables whose actual values are determined by equilibration. Predictors are chosen from a finite set. Each predictor is a function of past observations and has a performance measure attached to it which is publically available. Agents use a discrete choice model and make a rational choice concerning the predictor based upon the performance measure. This results in a dynamics across predictor choice which is coupled to the dynamics of the endogenous variables. When there is at least one `stabilizing' predictor (e.g. rational or long memory expectations) driving the endogenous variable toward its steady state value and at least one `destabilizing' predictor (e.g. adaptive or short memory expectations) driving the endogenous variable away from its steady state value, then the adaptive rational equilibrium dynamics can be very complicated and cycles and chaos can arise. The irregularity of the equilibrium time paths is explained by the existence of a homoclinic orbit and its associated complicated dynamical phenomena, when the intensity of choice between predictors is high. Thus local instability and global complicated dynamics may be a feature of a fully rational notion of equilibrium.

To our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.

Paper provided by Santa Fe Institute in its series Working Papers with number 95-03-029.

as
in new window

Length:
Date of creation: Mar 1995
Date of revision:
Handle: RePEc:wop:safiwp:95-03-029
Contact details of provider: Postal: 1399 Hyde Park Road, Santa Fe, New Mexico 87501
Web page: http://www.santafe.edu/sfi/publications/working-papers.html

More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  2. Brock, William A & LeBaron, Blake D, 1996. "A Dynamic Structural Model for Stock Return Volatility and Trading Volume," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 94-110, February.
  3. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
  4. GRANDMONT, Jean-Michel, 1997. "Expectations formation and stability of large socioeconomic systems," CORE Discussion Papers 1997088, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December.
  6. de Vilder, Robin, 1996. "Complicated Endogenous Business Cycles under Gross Substitutability," Journal of Economic Theory, Elsevier, vol. 71(2), pages 416-442, November.
  7. Pintus, Patrick & Sands, Duncan & de Vilder, Robin, 2000. "On the transition from local regular to global irregular fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 24(2), pages 247-272, February.
  8. Marimon, Ramon, 1993. "Adaptive learning, evolutionary dynamics and equilibrium selection in games," European Economic Review, Elsevier, vol. 37(2-3), pages 603-611, April.
  9. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  10. Kurz, Mordecai, 1994. "On Rational Belief Equilibria," Economic Theory, Springer, vol. 4(6), pages 859-76, October.
  11. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March.
  12. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  13. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  14. Hommes, Cars H., 1994. "Dynamics of the cobweb model with adaptive expectations and nonlinear supply and demand," Journal of Economic Behavior & Organization, Elsevier, vol. 24(3), pages 315-335, August.
  15. Cabrales, Antonio & Hoshi, Takeo, 1996. "Heterogeneous beliefs, wealth accumulation, and asset price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 20(6-7), pages 1073-1100.
  16. Benhabib, Jess & Day, Richard H., 1982. "A characterization of erratic dynamics in, the overlapping generations model," Journal of Economic Dynamics and Control, Elsevier, vol. 4(1), pages 37-55, November.
  17. Evans, George W & Ramey, Garey, 1992. "Expectation Calculation and Macroeconomic Dynamics," American Economic Review, American Economic Association, vol. 82(1), pages 207-24, March.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wop:safiwp:95-03-029. 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: (Thomas Krichel)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.