Template-Type: ReDIF-Paper 1.0
Title: Rational vs. Irrational Beliefs in a Complex World
Author-Name: Gregor Boehl
Author-Email: gboehl@uni-bonn.de
Author-Name: Cars Hommes
Author-Email: ch.hommes@uva.nl

Classification-JEL: C63, E03, E32, E44, E51
Keywords: Heterogeneous agents, trend-extrapolation, bubbles, numerical solution method

Abstract: Can boundedly rational agents survive competition with fully rational agents? We develop a highly
nonlinear heterogeneous agents model with rational forward looking versus boundedly rational back-
ward looking agents and evolving market shares depending on their relative performance. Our novel
numerical solution method detects equilibrium paths characterized by complex bubble and crash dy-
namics. Boundedly rational trend-extrapolators amplify small deviations from fundamentals, while
rational agents anticipate market crashes after large bubbles and drive prices back close to fundamen-
tal value. Overall rational and non-rational beliefs co-evolve over time, with time-varying impact,
and their interaction produces complex endogenous bubble and crashes, without any exogenous
shocks.

Note: 
Length: 43
Creation-Date: 2021-04
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp287
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2021_287