Rational Heuristics? Expectations and Behaviors in Evolving Economies with Heterogeneous Interacting Agents

43 Pages Posted: 13 Dec 2017

See all articles by Giovanni Dosi

Giovanni Dosi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Mauro Napoletano

Observatoire Français des Conjonctures Economiques (OFCE); SKEMA Business School; Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Français des Conjonctures Economiques (OFCE)

Joseph E. Stiglitz

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Tania Treibich

Maastricht University - Department of Economics; Scuola Superiore Sant'Anna di Pisa; Observatoire Français des Conjonctures Economiques (OFCE)

Date Written: December 8, 2017

Abstract

We analyze the individual and macroeconomic impacts of heterogeneous expectations and action rules within an agent-based model populated by heterogeneous, interacting firms.

Agents have to cope with a complex evolving economy characterized by deep uncertainty resulting from technical change, imperfect information and coordination hurdles. In these circumstances, we find that neither individual nor macroeconomic dynamics improve when agents replace myopic expectations with less naïve learning rules.

In fact, more sophisticated, e.g. recursive least squares (RLS) expectations produce less accurate individual forecasts and also considerably worsen the performance of the economy. Finally, we experiment with agents that adjust simply to technological shocks, and we show that individual and aggregate performances dramatically degrade. Our results suggest that fast and frugal robust heuristics are not a second-best option: rather they are "rational" in macroeconomic environments with heterogeneous, interacting agents and changing "fundamentals".

Keywords: complexity, expectations, heterogeneity, heuristics, learning, agent-based model, computational economics

JEL Classification: C63, E32, E6, G01, G21, O4

Suggested Citation

Dosi, Giovanni and Napoletano, Mauro and Roventini, Andrea and Stiglitz, Joseph E. and Treibich, Tania, Rational Heuristics? Expectations and Behaviors in Evolving Economies with Heterogeneous Interacting Agents (December 8, 2017). Available at SSRN: https://ssrn.com/abstract=3085455 or http://dx.doi.org/10.2139/ssrn.3085455

Giovanni Dosi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

HOME PAGE: www.lem.sssup.it

Mauro Napoletano

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

60, rue Dostoïevski
Sophia-Antipolis Cedex, 06902
France

HOME PAGE: http://www.ofce.sciences-po.fr

SKEMA Business School ( email )

60 rue Dostoïevski
Sophia Antipolis, 06902
France

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE)

69 Quai d'Orsay
Paris 75004
France

Joseph E. Stiglitz

Columbia Business School - Finance and Economics ( email )

3022 Broadway
814 Uris Hall
New York, NY 10027
United States
(212) 854-0671 (Phone)
(212) 662-8474 (Fax)

HOME PAGE: http://www.josephstiglitz.com

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tania Treibich (Contact Author)

Maastricht University - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

Scuola Superiore Sant'Anna di Pisa ( email )

Pisa
Italy

Observatoire Français des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75004
France

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