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Discrete beliefs space and equilibrium: a cautionary note

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  • Michele Berardi

Abstract

Bounded rationality requires assumptions about ways in which rationality is constrained and agents form their expectations. Evolutionary schemes have been used to model beliefs dynamics, with agents choosing endogenously among a limited number of beliefs heuristics according to their relative performance. This work shows that arbitrarily constraining the beliefs space to a finite (small) set of possibilities can generate artificial equilibria that can be stable under evolutionary dynamics. Only when "enough" heuristics are available, beliefs in equilibrium are not arti?cially constrained. I discuss these findings in light of an alternative approach to modelling beliefs dynamics, namely adaptive learning.

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  • Michele Berardi, 2018. "Discrete beliefs space and equilibrium: a cautionary note," Centre for Growth and Business Cycle Research Discussion Paper Series 242, Economics, The University of Manchester.
    • Handle: RePEc:man:cgbcrp:242
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    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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