Learning to be rational

Abstract

We study the dynamical system of expectations generated by a simple general equilibrium model of an exchange economy in which each agent considers a finite collection of models, each of which specifies a relationship between payoff-relevant information and equilibrium prices. One of the models under consideration is a correct description of the rational expectations equilibrium. We find that under a Bayesian type of learning process the rational expectations equilibrium is locally stable, but that nonrational equilibria may also be locally stable.