Discrete beliefs space and equilibrium: a cautionary note

Research output: Working paper

Abstract

Bounded rationality requires assumptions about ways in which rationality is constrained and agents form their expectations. Evolutionary schemes have been used to model beliefs dynamics, with agents choosing endogenously among a limited number of beliefs heuristics according to their relative performance. This work shows that arbitrarily constraining the beliefs space to a finite (small) set of possibilities can generate artificial equilibria that can be stable under evolutionary dynamics. Only when "enough" heuristics are available, beliefs in equilibrium are not artificially constrained. I discuss these findings in light of an alternative approach to modelling beliefs dynamics, namely adaptive learning.
Original languageEnglish
Publication statusPublished - 13 Jul 2018

Publication series

NameCentre for Growth and Business Cycle Discussion Paper Series
PublisherThe University of Manchester
No.242

Keywords

  • expectations
  • evolutionary dynamics
  • learning
  • equilibrium

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