Discussion papers

CPM-97-30 - 1 December 1997

Boundedly versus Procedurally Rational Expectations

Scott Moss

To be published as: Moss, S. (forthcoming). Boundedly versus Procedurally Rational Expectations. In Hallet, H and McAdam, P. (eds.), New Directions in Macro Economic Modelling, Kluwer.

Abstract

Economists who have relied on the rational expectations hypothesis are now seeking to demonstrate that rational expectiations equilibria can emerge in models with agents who are artificually intelligent. Agents’ intelligence is represented by genetic algorithms. However, these algorithms misrepresent current understanding of human cognition as well as well known and long standing evidence from business history and the history of technology. A well validated representation of human cognition is implemented in SDML, a logic-based programming language which is optimized for representations of interactions among agents. Within that software environment, a model of a transition economy was developed with three production sectors and a household sector. The numerical outputs from that model are broadly in accord with the statistical evidence from the Russian economy. The model itself was developed explicitly to incorporate qualitatively specified characteristics of entrepreneurial behaviour in that economy. Unlike conventional economic models, transactions are negotiated and effected explicitly – there are no unspecified or underspecified “markets”.

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