Adaptively rational equilibrium is introduced, where agents adapt their beliefs by choosing from a finite set of predictor functions. Agents make a rational predictor choice, based upon a publically available performance measure such as realized past profits. This results in an adaptive belief system, where predictor choice is coupled to the market equilibrium dynamics. As a typical example, the cobweb model with rational versus naive expectations is analyzed. If the market is locally unstable and rational expectations are costly to obtain, a high intensity of choice for predictor selection leads to chaos and strange attractors.
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Article provided by Econometric Society in its journal Econometrica.
Volume (Year): 65 (1997) Issue (Month): 5 (September) Pages: 1059-1096 Download reference. The following formats are available: HTML
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