Learning from the Expectations of Others

29 Pages Posted: 3 Feb 2003

See all articles by Jim Granato

Jim Granato

National Science Foundation

Eran Guse

University of Cambridge - Faculty of Economics and Politics

M. C. Sunny Wong

Hobby School of Public Affairs, U of Houston

Abstract

The assumption of perfectly rational representative agents is now commonly questioned. This paper explores the equilibrium properties of boundedly rational heterogeneous agents. We combine an adaptive learning process in a modified cobweb model within a Stackleberg framework. We assume that there is an asymmetric information diffusion process from leading to following firms. In contrast to a simple cobweb model which has a unique REE, our model may produce multiple restricted perceptions equilibria (RPE). However, a unique and learnable RPE, under certain conditions, can exist in our model. In addition, the following firms' forecasts can confound the leading firms' forecasts -- when the following firms misinterpret information coming from the leading firms. We refer this situation to the boomerang effect. We also find that the leading firms' mean squared forecast error can be even larger than that of following firms if the proportion of following firms is sufficiently large in the market.

Keywords: adaptive learning, bounded rationality, heterogeneous expectations, least squares learning, rational expectations

JEL Classification: C62, D83, D84

Suggested Citation

Granato, Jim and Guse, Eran A. and Wong, M. C. Sunny, Learning from the Expectations of Others. Available at SSRN: https://ssrn.com/abstract=343240 or http://dx.doi.org/10.2139/ssrn.343240

Jim Granato

National Science Foundation ( email )

Political Science Program
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Arlington, VA 22230
United States
703-292-7284 (Phone)
703-292-9195 (Fax)

Eran A. Guse

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

M. C. Sunny Wong (Contact Author)

Hobby School of Public Affairs, U of Houston ( email )

McElhinney Hall
3623 Cullen Boulevard Room 306
Houston, TX 77204
United States
713 743 3970 (Phone)

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