Why is there a current lack of methodological diversity? One cause (in my impression) is a perception that more diversity may: … increase the uncertainty of economic claims and predictions; … destroy a number of core principles that economists currently find familiar and comforting;... cause economic theory and economists to lose status Diversity in Macroeconomics

A reassuring claim: “...rational expectations is not a strong assumption, because most macro models under learning converge to the RE equilibrium anyway” A significant body of research on learning goes back to Thomas Sargent and others. [See, for example, George W. Evans & Seppo Honkapohja, "Learning as a Rational Foundation for Macroeconomics and Finance," (2013)] Hence, it seems that the rational expectations paradigm really is robust; its conclusions rest on solid ground. BUT: what kind of learning are we talking about? Example: the “learning literature”

How do agents in these models learn their expectations? 1. It is assumed that the economy's equations of motion take a fairly simple form. 2. It is assumed that the agents ALREADY KNOW the correct form of these equations; they only remain ignorant of the values of a few parameters. 3. Agents learn by trial and error and adjustment of their parameters Conclusion: under learning, macro models often converge to the RE equilibrium!!

But is this really “learning”?? Maxwell's Equations Electricity and magnetism is far simpler than any economy. But could a teacher plausibly assume that his students ALREADY KNOW the correct form of these equations; that they only remain ignorant of the values of ε 0 and μ 0 ?

So – why this funny kind of “learning”?? Apparent answer: The goal of this research is NOT to examine what an economy might do if one makes realistic assumptions about how people learn. The goal IS to explore HOW MUCH the notion of rational expectations can be relaxed in macro models while still getting essentially the same results. (answer – not very far!) In my opinion, the past learning literature looks like an exercise in “theory preservation”, not real exploration.

Welcome changes: Runs experiments: people form their expectations in an unrestricted way, without knowing the equations of motion of the economy. What happens?

Results: … there is a pervasive heterogeneity in the forecasting rules used by the subjects......individual forecasting behaviors often involve switching from one heuristic to another... … rational expectations predicts outcomes very poorly... …aggregate outcomes are uncertain... featuring convergence to (some) equilibrium, permanent oscillations or oscillatory convergence. Allowing diversity means accepting greater uncertainty

Robert Lucas (1972): Albert Einstein (1915): Does economics suffer from physics envy? Andrew Lo

My belief: Economists have envied the WRONG KIND OF PHYSICS!! What is the right kind of physics?

Imagine a “stupid” experiment: put some metal beads in a container Start slow, then speed up. Does anything interesting happen? Shake up and down

Patterns What happens? Harry Swinney University of Texas

Weirder stuff too: “oscillons”

“Education is the path from cocky ignorance to miserable uncertainty.” Mark Twain Thank you for listening!