tag:blogger.com,1999:blog-4979477022008569617.post4568450271206429034..comments2023-05-02T06:38:35.510-07:00Comments on Roger Farmer's Economic Window: Rational Expectations and Animal SpiritsRoger Farmerhttp://www.blogger.com/profile/05213844698773859392noreply@blogger.comBlogger5125tag:blogger.com,1999:blog-4979477022008569617.post-14359027636317608702014-02-09T11:49:32.303-08:002014-02-09T11:49:32.303-08:00hermanq and daniels
Thanks for your comments.
dan...hermanq and daniels<br />Thanks for your comments.<br /><br />daniels is right about the no trade theorem. In my work, the set of participants is changing over time and that leads to trade in asset markets. I'm not sure how to identify a 'speculative trade'. In my work, everyone agrees about ex ante probabilities and that, I think, is what hermanq is uncomfortable with.<br /><br />The assumption of common priors is indeed a very strong assumption and one that I think it worth relaxing.<br /><br />There is a growing acceptance in the research community of models that drop the strong form of rational expectations; but no agreement yet of what to replace it with.Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-91528966609388775612014-02-08T08:14:23.475-08:002014-02-08T08:14:23.475-08:00Stokey and Milgrom no trade result assumes pareto ...Stokey and Milgrom no trade result assumes pareto optimality. Speculative trade can occur under RE if the world is pareto inefficient.danielshttps://www.blogger.com/profile/01799942447501959179noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-75889734714197461492014-02-06T06:55:28.667-08:002014-02-06T06:55:28.667-08:00Roger Farmer
" Agents are willing to trade be...Roger Farmer<br /><i>" Agents are willing to trade because they have different preferences over outcomes"</i><br /><br />Yes, but can there be *speculative* trade (in financial mkts) with multiple RE equilibria? The problem arises from Aumann's famous <a href="http://projecteuclid.org/euclid.aos/1176343654" rel="nofollow"><i>Agreeing to Disagree</i></a> theorem.:<br /><i>" If two people have the same priors, and their posteriors for an event E are common knowledge, then these posteriors are equal."</i><br /><br /> Also Milgram and Stokey (1982), <a href="" rel="nofollow"><i>Information, trade and common knowledge</i></a> :<br /><i>"... when risk-averse traders begin at a Pareto optimal allocation (relative to their prior beliefs) and then receive private information (which disturbs the marginal conditions), they can still never agree to any non-null trade"</i><br /><br />The evidence for speculative trades in financial markets is, I think, pretty strong.<br /><br />Also, in the broader macroeconomy, a fair case can be made that the severity and persistence of the current recession has something to do with agents' pre-crisis plans not being realized.<br /><br /><i> "The issue of heterogeneity of beliefs is, for me, an important open question."</i><br /><br />Good to read this. If only more equilibrium theorists were as open-minded, the criticism of RE would have been much more muted. After all, even most critics would concede that the idea of RE is certainly important in many contexts, and multiple equilibria perhaps even more so.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-39386454249755495742014-02-05T20:10:16.925-08:002014-02-05T20:10:16.925-08:00Thanks for your comment Greg.
I'm a little mo...Thanks for your comment Greg.<br /><br />I'm a little more demanding than "allowing in a few market participants to forecast correctly from time to time". I want the belief function to have the property that it coincides with RE in stationary environments.<br /><br />Yes: it's worth separating beliefs about the state of nature from beliefs about others' beliefs. <br /><br />All of my existing work assumes homogenous beliefs. Agents are willing to trade because they have different preferences over outcomes. The issue of heterogeneity of beliefs is, for me, an important open question.Roger Farmerhttps://www.blogger.com/profile/05213844698773859392noreply@blogger.comtag:blogger.com,1999:blog-4979477022008569617.post-5787873787411576572014-02-04T21:47:51.463-08:002014-02-04T21:47:51.463-08:00Hi Roger,
“Welcome to my alternate reality!” And...Hi Roger, <br /><br />“Welcome to my alternate reality!” And what a fascinating reality it promises to be, though some of us will need a more detailed map. <br /><br />You describe the rational expectations assumption in terms of Lincoln’s famous line, “You can fool all of the people some of the time or some of the people all of the time but you can’t fool all of the people all of the time.” I think Lincoln was actually saying that no person (political opportunist) can fool all of the people all of the time, whereas I think you’re claiming that all of the people (market participants) won’t make errant forecasts all of the time (in other words, there’s no “fooling” involved, or at least not much of it). <br /><br />If I’ve interpreted your view correctly – i.e., that everyone can’t make errant forecasts all of the time – then this would seem to a proposition no sane modeler of expectations could reject. Allowing a few market participants to forecast correctly from time to time isn’t a very demanding requirement. <br /><br />“Beliefs are fundamental!” It may be worth distinguishing between two kinds of beliefs: 1) beliefs about future states of nature, e.g., winter temperatures in New England next year; and 2) beliefs about future states of the economy that depend on conjectures about the future beliefs of others [Keynes’ “beauty contest”]. The first kind of beliefs can’t be self-fulfilling, but the second kind can be. By the same token, and more importantly, self-fulfilling beliefs need not be held by everyone. If a preponderance of firms believes employment will be high, then it will be high. But everyone’s expectations won’t be fulfilled. So, to conclude with a question, does your conception of a “belief function,” that is, your operationalization of “animal spirits,” assume that all agents experience the same degree of optimism or pessimism (or whatever measure of “animal spirits” you use in your model)?<br /><br />P.S. This is one of the most intriguing posts I’ve ever read!<br />Anonymoushttps://www.blogger.com/profile/11677815746117897839noreply@blogger.com