Rationality, bounded rationality and microfoundations: Foundations of theoretical economics

321 Pages·2007·1.809 MB·English

by  Reza Salehnejad (auth.)

Rationality, Bounded Rationality and
Microfoundations
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Rationality, Bounded
Rationality and
Microfoundations
Foundations of Theoretical Economics
Reza Salehnejad
©RezaSalehnejad2007
Softcover reprint of the hardcover 1st edition 2007 978-0-230-00480-1
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10 9 8 7 6 5 4 3 2 1
16 15 14 13 12 11 10 09 08 07
Contents
ListofFigures viii
ListofTables ix
Preface x
Introduction 1
1 TheoreticalversusAtheoreticalMacroeconomics:Concepts
andControversies 7
1.1 Introduction 7
1.2 Macroeconomics 8
1.2.1 Structure 9
1.2.2 Objectives 11
1.3 Theneedfortheory 15
1.3.1 Statisticalcontrol 15
1.3.2 Theidentificationproblem 21
1.3.3 TheLucasargument 22
1.4 Thetheoreticalapproach 23
1.5 Atheoreticalmacroeconomics 27
1.5.1 Methodologicalinterpretation 28
1.5.2 Metaphysicalinterpretation 33
1.6 Conclusion 35
2 RationalBehaviourandEconomicTheory 36
2.1 Introduction 36
2.2 Rationalchoice 38
2.2.1 Savage’stheoryofsubjectiveexpectedutility 38
2.3 Restatingtheissues 43
2.4 Adiscussionofthepostulates 45
2.4.1 Theconstructivenatureofpreferences 45
2.4.2 Theentanglementofvaluesandbeliefs 50
2.5 Thelimitedroleofrationalchoicetheories 52
2.5.1 Choice-basedtheoriesandeconomiccontroversies 52
2.5.2 Howeconomiccontroversiesaresettled 56
2.5.3 Whytheeconometricmethodfails 60
2.6 Expectations 62
2.6.1 Adaptiveexpectations 62
2.6.2 Rationalexpectations 62
2.6.3 ProblemswiththeREhypothesis 65
2.7 Conclusion 68
v
vi Contents
3 ‘HomoEconomicus’asanIntuitiveStatistician(1):
Model-FreeLearning 70
3.1 Introduction 70
3.2 Statisticalmodelspecification 73
3.3 Non-parametricstatisticalinference 77
3.3.1 Thebasicidea 78
3.3.2 Thenaïveestimator 78
3.3.3 Kernel-basedestimators 79
3.4 Thehomoeconomicusasanon-parametricstatistician 82
3.5 Intrinsiclimitationsofmodel-freeinference 83
3.5.1 Thebias–variancedecomposition 83
3.5.2 Thebias–variancetrade-off 85
3.5.3 Thecurseofdimensionality 89
3.5.4 Defeatingthecurseofdimensionality 90
3.5.5 Thelossofinterpretability 92
3.6 Modelselection 92
3.6.1 Alternativemodelselectors 93
3.6.2 Whichmodelselectorshouldbeused? 97
3.6.3 Extrapolationerror 100
3.7 Conclusion 103
4 ‘HomoEconomicus’asanIntuitiveStatistician(2):Bayesian
DiagnosticLearning 106
4.1 Introduction 106
4.2 Foundationalissues 108
4.3 TheorthodoxviewofBayesianinference 116
4.4 Bayesianstatisticalinference:awiderview 119
4.5 InitialBayesianmodelformulation 121
4.5.1 Initialdatamodelspecification 122
4.5.2 Priorspecification 135
4.5.3 Somelimitations 141
4.6 Bayesianempiricalmodelassessment 142
4.6.1 Ageneralframeworkformodelassessment 142
4.6.2 Bayesianspecificationsearches 150
4.7 Modelselection 157
4.8 Objectionsrevisited 160
4.9 Conclusion 163
5 ‘HomoEconomicus’asanIntuitiveStatistician(3):
Data-DrivenCausalInference 165
5.1 Introduction 165
5.2 Preliminariesandprinciples 167
5.2.1 Causalstructure 167
5.2.2 Pathmodels 169
Contents vii
5.2.3 Graphicalrepresentation 170
5.2.4 Conditionalindependencedata 171
5.2.5 Assumptionsrelatingprobabilitytocausalrelations 172
5.3 Causalinference 174
5.3.1 Inferencewithcausalsufficiency 175
5.3.2 Inferencewithoutcausalsufficiency 176
5.4 Intrinsiclimitationsofdata-drivencausalinference 180
5.4.1 Recursiveequivalentmodels 181
5.4.2 Non-recursiveequivalentmodels 186
5.4.3 Causalinferenceinpractice 187
5.5 Assumptionsrevisited 189
5.5.1 ThecausalMarkovcondition 189
5.5.2 Thefaithfulnesscondition 197
5.6 Conclusion 202
6 TheEconomyasanInteractiveSystem:AnAppraisalofthe
MicrofoundationsProject 204
6.1 Introduction 204
6.2 Therepresentativeagentmodellingapproach 206
6.2.1 Thestructureoftherepresentativeagentapproach 207
6.2.2 Ahistoricalexample 207
6.2.3 Therequirementsoftherepresentative-agent
approach 209
6.2.4 Problemswiththerepresentative-agentapproach 216
6.3 Modellingheterogeneousbehaviour 218
6.3.1 Thefundamentaltheoremofexactaggregation 219
6.3.2 Theeffectofnon-linearity 223
6.3.3 Theeffectofdynamics 224
6.3.4 Theeffectofheterogeneousenvironments 225
6.3.5 Heterogeneityandpolicyevaluation 227
6.4 Modellinginteraction 229
6.4.1 Marketinteractions 229
6.4.2 Non-marketinteractions 231
6.5 Conclusion 236
Finale 238
Appendices 241
Notes 269
Bibliography 278
Index 301
List of Figures
1.1 Abarrenproxy 20
3.1 Kernelsmoothing,bandwidth=6.0 87
3.2 Kernelsmoothing,bandwidth=0.01 87
3.3 Kernelsmoothing,bandwidth=0.7 87
3.4 Kernelregressionestimate,h=0.03,N=101 88
3.5 Kernelregressionestimate,h=0.03,N=1001 88
3.6 Kernelregressionestimate,h=0.03,N=10001 88
3.7 Kernelregressionwithleave-one-outcross-validation 97
3.8 Kernelregressionwithgeneralizedcross-validation 98
3.9 Extrapolation 101
4.1 Thestructureofthemodelreservoir 123
4.2 Unemploymentdata 128
4.3 Unemploymentdata:samplePACF 129
4.4 Symmetryplotunemploymentdata 132
4.5 Linearityassessmentunemploymentdata 133
4.6 Bivariatenormalitytest 134
4.7 ModelAR(1)I 153
5.1 AgraphicalrepresentationofModelI 171
5.2 Anunfaithfulstructure 174
5.3 Apartiallyconnectedskeleton 176
5.4 Inducingpathgraph 178
5.5 Equivalenthybridgraphs 179
5.6 Latentcommoncauses 179
5.7 Equivalentpathmodels 181
5.8 MarkovianequivalentDAGs 183
5.9 Alegitimateedgereplacement 184
5.10 Equivalentgraphswithdifferentunshieldedcolliders 185
5.11 Semi-MarkovianequivalentDAGs 185
5.12 Equivalentlimitedblock-recursivegraphs 186
5.13 TimeorderingandMarkovianmodelequivalence 188
5.14 Markovianequivalentmodelswithvaryingcoefficient
estimates 188
5.15 Anexampleofselectionbias 193
5.16 EquivalentDAGswithacase-selectionvariable 195
5.17 Causalinferenceinthepresenceofselectionbias 195
5.18 Concomitantsandcompleteness 196
5.19 Afaithfulexplanation 198
5.20 Anunfaithfulexplanation 199
5.21 Stablespuriousindependencedata 201
viii
List of Tables
2.1 Savage’ssmallworld 39
2.2 Preferencereversalphenomenon 47
4.1 Equivalentbets(1) 109
4.2 Equivalentbets(2) 112
4.3 Definitionofvectorofinterest 152
4.4 Posteriorpredictivedistributionofvectorofinterest 153
4.5 Posteriorpredictivedistributionofvectorofinterest 154
4.6 Predictivedistributionofvectorofinterest 156
4.7 Predictivedistributionofvectorofinterest 157
5.1 Contrivedcovariancedata 188
5.2 Aggregationoverheterogeneousunits 191
ix