Equilibrium — an assumption making many theories inaccurate

23 Feb, 2019 at 17:42 | Posted in Economics | 2 Comments

For the learning rules we study, the players never converge to any sort of “intertemporal equilibrium”, in the sense that their expectations do not match the outcomes of the game even in a statistical sense …

moAre these results relevant for macroeconomics? Can we expect insights that hold at the small scale of strategic interactions between two players to also be valid at much larger scales?

While our theory does not directly map to more general settings, many economic scenarios – buying and selling in financial markets, innovation strategies in competing firms, supply chain management – are complicated and competitive. This raises the possibility that some important theories in economics may be inaccurate. Challenges to the behavioral assumption of equilibrium also challenge the predictions of the model. In this case, new approaches are required that explicitly simulate the behavior of economic agents and take into account the fact that real people are not good at solving complicated problems.

Marco Pangallo & Torsten Heinrich & J Doyne Farmer

2 Comments

  1. It is not just people’s strategies that don’t tend to equilibrium solution. Describing situation as a ‘problem’ to be ‘solved’ implies there is an answer, and the only difficulty with model is people’s failure to act ‘rationally’. Ignores fact that much of world, including markets, are complex, non-deterministic, probabilistic systems that don’t have an equilibrium to find.
    Mandelbrot (in The (Mis)behaviour of Markets: A Fractal View of Risk, Ruin and Reward) demonstrates markets don’t fit equilibrium models.

  2. If the interest is in macroeconomic equilibrium, why bother talking about game theoretic neoclassical general equilibrium models?


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