SFI Working Paper Series
No. SFIWP0008 2012-06-04
Smart or Stupid Depends on Who is Your Counterpart:
A Cobweb Model with Heterogeneous Expectations
Feng Guo[1]
Abstract: We investigate the dynamics of a cobweb model with heterogeneous expectations, generalizing the famous Brock and Hommes (1997, Econometrica, 65, 1059-1095) by adding a new predictor- periodical expectations, which predict the price will revert to the level two periods ahead. We show that the periodical predictor, which leads logical errors when the agents are homogeneous, may be either smart or stupid in the cobweb model with heterogeneous expectations, depending on who is its counterpart. In the cobweb framework, the periodical predictor may be a destabilizer, or a stabilizer, depending on its circumstance. We also find that in the cobweb model with rational, naive and periodical expectations, under some refined conditions, rational predictor may be dominated endogenous. In the cobweb framework with naive and periodical expectations, or the framework with rational, naive and periodical expectations, the evolutionary dynamics may exhibits ‘rational routes to randomness’.
KeyWords: Cobweb Model, Heterogeneous Expectations, Periodical Expectations, Bifurcation, Endogenous Fluctuations
JEL classication：C62, D84, E32
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