Abstract:
Trade among individuals occurs either because tastes (risk aversion) differ, endowments
differ, or beliefs differ. Utilising the concept of 'adaptively rational equilibrium' and a recent framework
of Brock and Hommes [6, 7] this paper incorporates risk and learning schemes into a simple
discounted present value asset price model with heterogeneous beliefs. Agents have different risk
aversion coefficients and adapt their beliefs (about future returns) over time by choosing from different
predictors or expectations functions, based upon their past performance as measured by realized
profits. By using both bifurcation theory and numerical analysis, it is found that the dynamics of asset
pricing is affected by the relative risk attitudes of different types of investors. It is also found that
the external noise and learning schemes can significantly affect the dynamics. Compared with the
findings of Brock and Hommes [7] on the dynamics caused by change of the intensity of choice to
switch predictors, it is found that many of their insights are robust to the generalizations considered:
however, the resulting dynamical behavior is considerably enriched and exhibits some significant
differences.
