Rational Expectations Theory

The article addresses critical discourses pertaining to triangulation methodology as a step forward in dealing with policy formulation, particularly at the Bank of Sierra Leone. Alternative prescriptive measure like critical discourse analysis have been proposed as a means to the cutting head development in bridging the gap between orthodox and heterodox views of economic sciences investigations.

Hayek and the Efficient Market Hypothesis are often seen as proposing a similar theory of prices. Hayek is seen as proposing to understand prices as information conveyer, incorporating inform...

Expected Utility Theory (EUT) has anomalies when interpreted descriptively and tested empirically. Experiments show that the way in which options are formulated is, in most cases, relevant for decision-making. This kind of anomaly is directly related, however, not with a proper axiom of EUT but rather with the logical principle of extensionality and its decision theoretic version: the principle of invariance. This paper focuses on the phenomenon of framing effects (FE) and the associated failures of invariance. FE arise when different (...) descriptions of the same object lead to different preferences, beliefs, or choices. A formal reconstruction of the Gain–Loss (G-L) frame is proposed, expanding the domain of standard decision theory to incorporate not only prospects but also descriptions of prospects. The system is extended by adding non-monotonic logical resources so as to account for the ceteris paribus character of FE. Finally, the same method is applied to sketching a formal representation for an anomalous case that involves subjective probabilities. The logical method is a general one that can be applied to most cases of FE. The philosophical consequences of the strategy pursued are also discussed. (shrink)

In this chapter I examine how expected-value theory might inform responses to what I call the dual-use problem. I begin by defining that problem. I then outline a procedure, which invokes expected-value theory, for tackling it. I first illustrate the procedure with the aid of a simplified schematic example of a dual-use problem, and then describe how it might also guide responses to more complex real-world cases. I outline some attractive features of the procedure. Finally, I consider whether and how (...) the procedure might be amended to accommodate various criticisms of it. (shrink)

By introducing elements of phenomenological philosophy to the analysis of human needs in economics; from Sartrean postulates as well as the nature and essence of individual’s needs, has been revealed a theorethical framework that serves to ponder human being’s existential behavior by means of their phenomenologic social choices and welfare. Defining a planning agent under strong assumptions of rationality and projective efficacious capabilities, the Arrow’s theorem has been proved for the economic agent aware of its finitude in this world.

The paradigm for modelling decision-making under uncertainty has undoubtedly been the theory of Expected Utility, which was first developed by von Neumann and Morgenstern (1944) and later extended by Savage (1954) to the case of subjective uncertainty. The inadequacy of the theory of Subjective Expected Utility (SEU) as a descriptive theory was soon pointed out in experiments, most famously by Allais (1953) and Ellsberg (1961). The observed departures from SEU noticed by Allais and Ellsberg became known as “paradoxes”. The Ellsberg (...) paradox gave rise, several years later, to a new literature on decision-making under ambiguity. The theoretical side of this literature was pioneered by Schmeidler (1989). This literature views the departures from SEU in situations similar to those discussed by Ellsberg as rational responses to ambiguity. The rationality is “recovered” by relaxing Savage's Sure-Thing principle and adding an ambiguity-aversion postulate. Thus the ambiguity-aversion literature takes a normative point of view and does consider Ellsberg-type choices as behavioural “anomalies”. (shrink)

Al-Najjar and Weinstein argue that the extant literature on ambiguity aversion is not successful in accounting for Ellsberg choices as rational responses to ambiguity. We concur, and propose that rational choice under ambiguity aims at robustness rather than avoidance of ambiguity. A central argument explains why robust choice is intrinsically context-dependent and legitimately violates standard choice consistency conditions. If choice consistency is forced, however, ambiguity-aversion emerges as a semi-rational response to ambiguity.

The assumption of rational expectations (RE) plays two roles in economic models: it imposes restrictions on behaviour of agents, and it ensures model consistency. Dissatisfaction with RE on behavioural grounds has, in a variety of models, led to its replacement by more behaviourally plausible postulates. However, replacing RE by ad hoc behavioural postulates may result in internally inconsistent models. This work introduces a conceptual framework within which the nature of the issue can be described, and points to potential problems that (...) the abandonment of RE entails. We argue that the RE-based notion of consistency is model-specific rather than general, and introduce a weaker consistency condition that is relevant for non-RE models. To assess the consistency of these models, we propose a test and illustrate its use taking an example from the recent literature. Broader implications of the findings are discussed. (shrink)

Whereas principles of justice adjudicate interpersonal conflicts, principles of prudence adjudicate intrapersonal conflicts – i.e., conflicts between the preferences an individual has now and the preferences he will have later. On a contractarian approach, principles of justice can be theoretically grounded in a hypothetical agreement in an appropriately specified pre-moral situation in which those persons with conflicting claims have representatives pushing for their claims. Similarly, I claim, principles of prudence can be grounded in a hypothetical agreement in an appropriately specified (...) pre-prudential situation in which those temporal parts of a person with conflicting claims have representatives as advocates of their claims. During the course of developing the prudential contractarian methodology, I consider a dispute between those who would see principles of justice as the outcome of a choice (e.g., Rawls) and others (e.g., Gauthier) who argue for viewing principles of justice as the outcome of a bargain. I contend that the reasons I adduce in favor of viewing principles of prudence as the outcome of a choice weigh equally in favor of viewing principles of justice as the outcome of a bargain. Footnotes1 This paper reviews and extends some of the material from my (2001). Farid Abdel-Nour, Ben Eggleston, Umut Ergun, and David Gauthier provided helpful comments on an earlier draft of this paper, for which I am very grateful. I am also indebted to two anonymous referees and Luc Bovens for some very helpful suggestions. (shrink)

If voters accord evidentiary value to one another's reports, revising their own views in the light of them as Bayesian rationality requires, then even relatively small electoral majorities ought to prove rationally compelling and opposition ought rationally to vanish. For democratic theory, that is a jarring result. While there are no resources for avoiding that result within the Bayesian model itself, there are various aspects of the political process lying outside that model which do serve to underwrite the rationality of (...) persistent opposition to majority opinion. Key Words: Bayesian rationality • consensus • political opposition. (shrink)

The concept of patience describes a person's ability to make prolonged efforts towards future goals, and his or her ability to consider long-term future consequences. Clearly, patience is a capacity that comes by degrees. On the following pages, a person will be said to be patient to the extent that his actions are motivated by future consequences. Hence, a person is not patient if he has the ability to see long-term consequences, while being unable to take these consequences into consideration (...) when he decides how to act. (shrink)

The context-free weak ordering principle is viewed by many as a cornerstone of rational choice theory. McClennen, for example, claims that this principle is one of a pair on which '[t]he theory of rational choice and preference, as it has been developed in the past few decades by economists and decision theorists, rests', and Sen characterizes a version of context freedom as ‘a very basic requirement of rational choice’. But this principle is certainly not uncontroversial: there are examples of principle (...) is certainly not apper irrational. (shrink)

Why is common priors are implicit or explicit in the vast majority of the differential information literature in economics and game theory? Why has the economic community been unwilling, in practice, to accept and actually use the idea of truly personal probabilities in much the same way that it did accept the idea of personal utility functions? After all, in, both the utilities and probabilities are derived separately for each decision maker. Why were the utilities accepted as personal, and the (...) probabilities not? (shrink)