Dynamics of beliefs and learning under aL-processes -: the heterogeneous case

This paper studies a class of models in which agents' expectations influence the actual dynamics while the expectations themselves are the outcome of some recursive processes with bounded memory. Under the assumptions of heterogeneous expectations (or beliefs) and that the agents update their expectations by recursive L- and general a(L)-processes, the dynamics of the resulting expectations and recursive schemes are analyzed. It is shown that the dynamics of the system, including stability, instability and bifurcation, are affected differently by the recursive processes. The cobweb model with a simple heterogeneous expectation scheme is employed as an example to illustrate the stability results, the various types of bifurcations and the routes to complicated price dynamics. In particular, the double-edged effect, of heterogeneity on the dynamics of the model is demonstrated. (C) 2002 Elsevier Science B.V. All rights reserved.