Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems

Cars Hommes is Professor of Economic Dynamics at the University of Amsterdam (UvA). After his PhD in Mathematical Economics at the University of Groningen, he founded the Center of Nonlinear Dynamics in Economics and Finance (CeNDEF), an interdisciplinary research group at UvA, pursuing theoretical, experimental and empirical research on complex systems, bounded rationality and behavioral agent-based models in economics and finance.

• 1. Introduction; 2. Bifurcations and chaos in 1-D systems; 3. Bifurcations and strange attractors in 2-D systems; 4. The nonlinear cobweb model; 5. The cobweb model with heterogeneous expectations; 6. An asset pricing model with heterogeneous beliefs; 7. Empirical validation; 8. Laboratory experiments.

'Professor Hommes' work is a major contribution to the understanding of intertemporal economic fluctuations. In a world in which production and investment behavior is motivated by expectations of the future, the way those expectations are formed becomes of the utmost importance. These expectations lead to dynamic systems, and the author draws on the rich literature developed for the study of mechanical and gravitational phenomena. These lead to the emergence of very complex behavior in markets driven by expectations, especially when different economic agents have different modes of forming expectations from data. The study of this book will have a profound impact on the theoretical and empirical analysis of securities markets and other forms of investment.' Kenneth J. Arrow, Joan Kenney Professor of Economics and Professor of Operations Research, Emeritus, Stanford University, and Winner of the Nobel Prize in Economics, 1972