Comments on: Sunspot Equilibria

By: PeterMcB

PeterMcB — Mon, 18 Sep 2006 23:39:08 +0000

Well, everyone knowing everyone else’s expectations is also a long way from reality. One of the problems of rational expectations theory (and neo-classical economics more generally) is its assumption that all economic actors, although they may differ in their preferences over outcomes, are identical in that they all have access to the same information, which they all receive at the same time, and that they each reason about (process) this information identically.

By: Walt

Walt — Mon, 18 Sep 2006 04:11:01 +0000

Sunspot equilibria are rational expectations equilibria, so that basically everyone knows what everyone else’s expectations are, yet everyone still acts as if prices depend on the sunspot (which make prices depend on the sunspot).

I am minority game skeptic. Everything I’ve ever seen seems to indicate that the main purpose of the model is to allow physicists to treat investors like they are little molecules in an ideal gas. It’s a long way from Keynes.

By: PeterMcB

PeterMcB — Sun, 17 Sep 2006 17:38:28 +0000

The British economist, John Maynard Keynes, once remarked that most people think of a stock market as a beauty contest where the objective was to choose the prettiest girl. In fact, he said, the real objective is to choose the girl which the other judges were going to choose as the prettiest. (JMK, of course, lived in less language-sensitive times.)

This, essentially, is why it is possible to use the minority game (or the El Farol Bar Problem) to successfully model financial markets. See wikipedia entries:

http://en.wikipedia.org/wiki/Minority_game

http://en.wikipedia.org/wiki/El_Farol_bar_problem

And see also the publications of the Oxford Centre for Computational Finance, especially those of Neil Johnson.

http://www.occf.ox.ac.uk/