view is useful I believe because it forces us to think about how beliefs create

View is useful i believe because it forces us to

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view is useful, I believe, because it forces us to think about how   beliefs create economic behavior and how  economic outcomes create beliefs.  And it leads to different insights. Beyond the simplest problems in economics,  this  ecological view of the economy becomes inevitable; and it leads to a      world of complexity.   The  standard way to handle predictive beliefs in economic analysis is to assume identical agents who  possess perfect rationality and arrive at shared , logical  conclusions  or expectations about the situation they face. When these expectations induce actions that aggregatively create a world that validates them as predictions, they are in equilibrium  and are called rational expectations.  Rational expectations  are useful in demonstrating logical equilibrium outcomes and  analyzing their consequences. But  in the real world  they  break down easily.   If  some  agents lack the  computing power  to deduce the posited outcome;  or  if some  arrive logically at different conclusions  from the  same data (as they might in a pattern recognition problem);  or if there is more than one rational expectations  equilibrium with no means to coordinate which is chosen;  then some  agents may deviate in their  expectations.  And  if some deviate, the world that is created may change,  so that others should logically  predict something different and deviate too. And  so      rational expectations  can  unravel easily.  Unless there are  special circumstances,  they are not robust.  There is a game in economics that illustrates this unraveling of rational  expectations beautifully. It is the Guessing Game, where N players choose a number between 0 and 100, and the winner is the one  closest to 2/3 of the average guess (see Nagel [16]). Obviously here, beliefs of what constitutes a good guess depend on one’s view of others’ beliefs of what constitutes a good guess. Now, uniform predictions of zero would constitute rational expectations; they would  be self-validating in that if agents expected other agents to choose zero they should also choose zero. Therefore expectations that  everyone will choose zero would be in equilibrium. And no other real number, if chosen by all, would constitute an expectational  equilibrium. But does that mean that zero will necessarily be chosen? If I, as a reference player, suspect that some players—or even  one player—may choose non-zero, then logically I ought to choose non-zero. And if I believe that others believe that someone may  choose non-zero, I will deduce that they too will choose non-zero. Thus beliefs that some may choose non-zero lead others to expect 
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