Cars H. Hommes

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Cars H. Hommes

Expectations Feedback and Adaptive Learning in Complex Economic Systems

PLANARY SESSION

Tuesday 23rd of September

Abstract:

Socio-economic systems are characterized by individuals who learn and adapt their behavior depending on how the system behaves. Expectations about the future play a crucial role in the emergent behavior of socio-economic systems. We discuss a behavioral theory of expectations in complex economic systems. An important role is played by non-rational “almost self-fulfilling equilibria”, such as bubble and crash dynamics, that may arise in systems with positive feedback. We discuss the empirical relevance of these equilibria for group behavior in laboratory experiments with paid human subjects. Economic policy analysis may benefit enormously by focusing on efficiency and welfare gains in correcting mispricing along almost self-fulfilling equilibria in complex economic systems.