Learning to Predict Rationally When Beliefs are Heterogeneous

33 Pages Posted: 9 Oct 2003

See all articles by Jan Wenzelburger

Jan Wenzelburger

Bielefeld University - Department of Business Administration and Economics

Abstract

This paper develops an adaptive learning scheme for an asset market with heterogeneous traders who are characterized by linear mean-variance preferences. We introduce the concept of a perfect forecasting rule which generates rational expectations for fundamentalists in the presence of investors with possibly non-rational beliefs. When these non-rational investors base their decisions on simple technical trading rules, perfect forecasting rules are approximated by successively estimating the excess demand function from historical data. Conditions are given under which trajectories generated by this adaptive learning scheme converge to trajectories with rational expectations for fundamentalists.

Keywords: Learning, bounded rationality, heterogeneity, security market line, CAPM

Suggested Citation

Wenzelburger, Jan, Learning to Predict Rationally When Beliefs are Heterogeneous. Available at SSRN: https://ssrn.com/abstract=437240 or http://dx.doi.org/10.2139/ssrn.437240

Jan Wenzelburger (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
D-33501 Bielefeld, NRW 33501
Germany
+49 521 106 4835 (Phone)
+49 521 106 6018 (Fax)

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