Rational vs. irrational beliefs in a complex world
- Can boundedly rational agents survive competition with fully rational agents? The authors develop a highly nonlinear heterogeneous agents model with rational forward looking versus boundedly rational backward looking agents and evolving market shares depending on their relative performance. Their novel numerical solution method detects equilibrium paths characterized by complex bubble and crash dynamics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while rational agents anticipate market crashes after large bubbles and drive prices back close to fundamental value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact, and their interaction produces complex endogenous bubble and crashes, without any exogenous shocks.
| Author: | Gregor BöhlGND, Cars Hommes |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-564539 |
| URL: | https://www.imfs-frankfurt.de/forschung/imfs-working-papers/details/publication/rational-vs-irrational-beliefs-in-a-complex-world.html |
| Parent Title (English): | Working paper series / Institute for Monetary and Financial Stability ; 156 |
| Series (Serial Number): | Working paper series / Institute for Monetary and Financial Stability (156) |
| Publisher: | Johann Wolfgang Goethe-Univ., Inst. for Monetary and Financial Stability |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2021 |
| Year of first Publication: | 2021 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2021/07/30 |
| Tag: | bubbles; heterogeneous agents; numerical solution method; trend-extrapolation |
| Issue: | April 16, 2021 |
| Page Number: | 47 |
| HeBIS-PPN: | 485410966 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / Institute for Monetary and Financial Stability (IMFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
