A Theory of Adaptive Economic Behavior by John G. Cross

By John G. Cross

This ebook develops dynamic fiscal versions utilizing the viewpoint and analytic framework supplied by means of mental studying conception. This framework is used to solve obvious contradictions among optimization concept, which lies on the middle of all smooth fiscal thought, and day by day facts that short-run fiscal behaviour can't quite be defined completely because the end result of successfully applied self-interest. the writer applies this perspective to a couple of areas of difficulty within which literal functions of maximization concept haven't frequently proved to be passable. those comprise analyses of decision-making less than uncertainty and playing behaviour, the function of consumer-oriented advertisements in influencing behaviour, the patience of cost dispersions in markets, and inflation.

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Example text

1 3) It is often the case that specific forms for the feedback function, when substituted into (2. 1 3) , enable us to show the existence of an alternative Ak for which E [ k, t+ d > k, i for any k, 1 < 1 , and this convergence in probability guarantees that eventually the alternative A k will be chosen with probability one. Let us define the set S to contain all those actions whose returns are seen to be successful, and the set F to be its com­ plement: S = ( i l 8; > 8 t l (2. 14) The nature of the problem of convergence in (2.

2 1 ) is not inconsistent with convergence, of course, and sufficiently cognitive behavior may still lead to permanent selection of Ak. More generally, however, the model suggests the engagement in constant search: Every choice being a failure, the individual is repeatedly driven toward other alternatives. This final example serves to dramatize a behavioral asymmetry that 40 A theory of adaptive economic behavior will characterize any model that is based on experience rather than full­ information optimization .

Having no alternative, we must employ some sort of utility concept to generate the payoff variable in our feedback function, but we can take advantage of some of this psychological material to make our formula­ tion more concrete. Even though we may not be able to specify the form of the preference function precisely, we can define it so that the variables that serve as its arguments are directly observable. That is, to the extent that future consumption is relevant to current choice behavior, it is reflected in the acquisition of certain goods (savings accounts, stock­ holdings, durable assets) that can be converted into consumption goods later on.

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