IDEAS home Printed from https://ideas.repec.org/p/sfu/sfudps/dp12-05.html
   My bibliography  Save this paper

A Behavioral Defense of Rational Expectations

Author

Abstract

This paper studies decision making by agents who value optimism, but are unsure of their environment. As in Brunnermeier and Parker (2005), an agent’s optimism is assumed to be tempered by the decision costs it imposes. As in Hansen and Sargent (2008), an agent’s uncertainty about his environment leads him to formulate ‘robust’ decision rules. It is shown that when combined, these two considerations can lead agents to adhere to the Rational Expectations Hypothesis. Rather than being the outcome of the sophisticated statistical calculations of an impassive expected utility maximizer, Rational Expectations can instead be viewed as a useful approximation in environments where agents struggle to strike a balance between doubt and hope.

Suggested Citation

  • Kenneth Kasa, 2012. "A Behavioral Defense of Rational Expectations," Discussion Papers dp12-05, Department of Economics, Simon Fraser University.
    • Handle: RePEc:sfu:sfudps:dp12-05
    as

    Download full text from publisher

    File URL: http://www.sfu.ca/repec-econ/sfu/sfudps/dp12-05.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Tomasz Strzalecki, 2011. "Axiomatic Foundations of Multiplier Preferences," Econometrica, Econometric Society, vol. 79(1), pages 47-73, January.
    2. Christopher A. Sims, 2001. "Pitfalls of a Minimax Approach to Model Uncertainty," American Economic Review, American Economic Association, vol. 91(2), pages 51-54, May.
    3. Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages 401-426, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Rational expectations as an optimal approximation
      by Economic Logician in Economic Logic on 2012-04-25 19:04:00

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Mejía Cubillos, Javier, 2012. "Libertad y desempeño económico [Freedom and economic performance]," MPRA Paper 37939, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gadi Barlevy, 2011. "Robustness and Macroeconomic Policy," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 1-24, September.
    2. Rhys Bidder & Ian Dew-Becker, 2016. "Long-Run Risk Is the Worst-Case Scenario," American Economic Review, American Economic Association, vol. 106(9), pages 2494-2527, September.
    3. Hansen, Lars Peter, 2013. "Uncertainty Outside and Inside Economic Models," Nobel Prize in Economics documents 2013-7, Nobel Prize Committee.
    4. Michael Woodford, 2010. "Robustly Optimal Monetary Policy with Near-Rational Expectations," American Economic Review, American Economic Association, vol. 100(1), pages 274-303, March.
    5. Azariadis, Costas & Stachurski, John, 2005. "Poverty Traps," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 5, Elsevier.
    6. Karantounias, Anastasios G., 2023. "Doubts about the model and optimal policy," Journal of Economic Theory, Elsevier, vol. 210(C).
    7. Cerreia-Vioglio, Simone & Maccheroni, Fabio & Marinacci, Massimo & Montrucchio, Luigi, 2012. "Probabilistic sophistication, second order stochastic dominance and uncertainty aversion," Journal of Mathematical Economics, Elsevier, vol. 48(5), pages 271-283.
    8. Dräger, Lena & Lamla, Michael J. & Pfajfar, Damjan, 2020. "The Hidden Heterogeneity of Inflation and Interest Rate Expectations: The Role of Preferences," Hannover Economic Papers (HEP) dp-666, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät, revised Feb 2023.
    9. Itzhak Gilboa & Andrew Postlewaite & Larry Samuelson & David Schmeidler, 2011. "Economic Models as Analogies," PIER Working Paper Archive 12-001, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    10. Ennis, Huberto M. & Keister, Todd, 2005. "Government policy and the probability of coordination failures," European Economic Review, Elsevier, vol. 49(4), pages 939-973, May.
    11. Alexei Onatski & Noah Williams, 2003. "Modeling Model Uncertainty," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1087-1122, September.
    12. Jingyi Xue, 2020. "Preferences with changing ambiguity aversion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(1), pages 1-60, February.
    13. repec:esx:essedp:770 is not listed on IDEAS
    14. Luo, Yulei & Young, Eric R., 2016. "Induced uncertainty, market price of risk, and the dynamics of consumption and wealth," Journal of Economic Theory, Elsevier, vol. 163(C), pages 1-41.
    15. Kelly, David L. & Shorish, Jamsheed, 2000. "Stability of Functional Rational Expectations Equilibria," Journal of Economic Theory, Elsevier, vol. 95(2), pages 215-250, December.
    16. Gérard Mondello, 2022. "Information Source's Reliability," GREDEG Working Papers 2022-21, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France, revised Oct 2022.
    17. Bullard, James & Duffy, John, 1999. "Using Genetic Algorithms to Model the Evolution of Heterogeneous Beliefs," Computational Economics, Springer;Society for Computational Economics, vol. 13(1), pages 41-60, February.
    18. Claudio A. Bonilla & Pablo A. Gutiérrez Cubillos, 2021. "The effects of ambiguity on entrepreneurship," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 30(1), pages 63-80, February.
    19. Marciano Siniscalchi, 2009. "Vector Expected Utility and Attitudes Toward Variation," Econometrica, Econometric Society, vol. 77(3), pages 801-855, May.
    20. Ben-Haim, Yakov & Demertzis, Maria, 2016. "Decision making in times of Knightian uncertainty: An info-gap perspective," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 10, pages 1-30.
    21. Ester Faia & Andreas Fuster & Vincenzo Pezone & Basit Zafar, 2024. "Biases in Information Selection and Processing: Survey Evidence from the Pandemic," The Review of Economics and Statistics, MIT Press, vol. 106(3), pages 829-847, May.

    More about this item

    Keywords

    Rational expectations; robustness;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sfu:sfudps:dp12-05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Working Paper Coordinator (email available below). General contact details of provider: https://edirc.repec.org/data/desfuca.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.