A Theory of Adaptive Economic Behavior by John G. Cross

By John G. Cross

This publication develops dynamic financial types utilizing the point of view and analytic framework supplied by means of mental studying concept. This framework is used to solve obvious contradictions among optimization conception, which lies on the middle of all sleek monetary concept, and day by day facts that short-run monetary behaviour can't kind of be defined exclusively because the final result of successfully applied self-interest. the writer applies this standpoint to a few troublesome areas within which literal functions of maximization thought haven't frequently proved to be passable. those comprise analyses of decision-making below uncertainty and playing behaviour, the function of consumer-oriented advertisements in influencing behaviour, the patience of rate dispersions in markets, and inflation.

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Extra info for A Theory of Adaptive Economic Behavior

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In equations (2. 1 8) and (2. 1 9)] with equalities. 6) ] . The aspiration level 81 i s generated a s a simple weighted average o f experience. In the case of consumption, the model is represented by ; L <�l > i, 0, 81) = 8; = 2. 0; > 81 { (8;(8; -- 81);, 8; < 81 1 if if (3 . 3) where I is a measure of income that we shall restrict to the alternative values I = 1 . 4, 1 . 6, or 1 . 08, 1 . 1 2, 1 . 36. These specific parameters have been chosen so as to produce an optimum value C* = 0. 8/ and so as to preserve the 44 A theory of adaptive economic behavior condition I 8; 8 1 1 < 1 for all available combinations of I and C.

Simulated short- and long-run consumption functions. In both of these examples the behavior of the dependent variable is similar to what we might expect from experience. There certainly are no new or surprising implications here. However, it is important to note that these patterns follow from the elementary feedback model itself, not from any auxiliary hypotheses concerning technological lags or bottle­ necks, and to this extent the feedback model is quite different from tradi­ tional theory. Short-run marginal effects Apart from the simulation procedure, it is possible to use the formal model to derive explicit expressions for the short-period consequences of changes in exogenous variables.

Demand functions estimated from quarterly data, for example, should be different from demand functions estimated from annual data, and unless one believes adjustment to be very rapid, neither of these should be asso­ ciated with the demand function of comparative statics. Nevertheless, the same underlying model is typically assumed for all of them, and when some concessions are made to short time frames (through the introduc­ tion of lagged independent variables), no theoretical justifications are provided for the specific forms of the equations to be estimated (beyond an occasional reference to technological or institutional rigidities).

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