The University of Chicago

To develop, debug, and disseminate macroeconomic models and software that do not assume rational expectations

  • Amount $690,000
  • City Chicago, IL
  • Investigator Thomas Sargent
  • Year 2018
  • Program Research
  • Sub-program Economic Institutions, Behavior, & Performance

In economics, the assumption called “rational expectations” holds that the value of a variable expected by agents in a model matches the expected value predicted by the model. As a description of the decision-making processes of actual, real-life people, rational expectations models seem unrealistic. The idea nevertheless dominates much of contemporary economics, not least because it vastly simplifies the modeling process. This grant funds work led by Nobel laureates Tom Sargent and Lars Hansen to develop a robust, mathematically rigorous alternative to rational expectations models. Sargent and Hansen envision agents not as utility maximizers with fully rational expectations, but rather as decision-makers using Bayesian reasoning to update their beliefs in light of uncertainty and limited information. The approach, while technically daunting, is very promising as a better description of real life. Grant funds will support the development, debugging, and dissemination of new models and of the software for analyzing them as well as a workshop, conference, and travel expenses for junior scholars participating in the project.

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