Beliefs asymmetry and price stability in a cobweb model

Research output: Contribution to journalArticlepeer-review

Abstract

It is known that a cobweb model with heterogeneous expectations and evolutionary selection on beliefs is able to generate irregular and complex price dynamics. I show in this work that a necessary condition for such dynamics to emerge is the asymmetry in the set of available predictors over which evolutionary forces operate. If predictors are symmetric around the rational one, heterogeneous expectations aggregate up to rationality, and the unique rational expectations price is stable. If predictors are asymmetrically distributed, instead, the outcome depends on the side of the asymmetry: a prevalence of predictors that overshoot price changes leads to market stability, irrespective on any dynamics on beliefs, while a predominance of predictors anchored to past prices can be destabilizing. It is only in this last case that an evolutionary selection mechanism can give rise to complex dynamics in prices. As the distribution of beliefs depends on the set of heuristics allowed to compete in the market, the design of this set is shown to be crucial for the possible outcomes of the model.
Original languageEnglish
Pages (from-to)401-415
Number of pages15
JournalJournal of Economic Behavior & Organization
Volume203
Early online date30 Sept 2022
DOIs
Publication statusPublished - 1 Nov 2022

Keywords

  • Evolutionary dynamics
  • Expectations
  • Heterogeneity
  • Heuristics

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