- Bounded rationality and learning in complex markets
- Book title
- Handbook Of Research On Complexity
- Number of pages
- Cheltenham: Edward Elgar
- Document type
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
This chapter reviews some work on bounded rationality, expectation formation and learning in
complex markets, using the familiar demand-supply cobweb model. We emphasize two stories of bounded
rationality, one story of adaptive learning and another story of evolutionary selection. According to the
adaptive learning story agents are identical, and can be represented by an "average agent", who adapts his
behavior trying to learn an optimal rule within a class of simple (e.g. linear) rules. The second story is
concerned with heterogeneous, interacting agents and evolutionary selection of different forecasting rules.
Agents can choose between costly sophisticated forecasting strategies, such as rational expectations, and
freely available simple strategies, such as naive expectations, based upon their past performance. We also
confront both stories to laboratory experiments on expectation formation. At the end of the chapter, we
integrate both stories and consider an economy with evolutionary selection between a costly sophisticated
adaptive learning rule and a cheap simple forecasting rule such as naive expectations.
Keywords: complex systems, behavioral economics, evolutionary selection, nonlinear dynamics.
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