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INEXC is an International Network on Expectations Coordination, a consortium of 13 universities and institutions in the US, Europe, China, South America and Japan funded by the Institute of New Economic Thinking (INET). The network is coordinated by Roger Guesnerie (Collège de France, Paris).
In spite of an intense academic activity over previous decades, the current
crisis suggests that economic theory has failed to provide an appropriate global
understanding of the recent events. Two key assumptions underlying most existing
theories have been rightly questioned.
One group of critics has proposed that agents in financial markets are less
rational than has been assumed in most economists’ models. Departures from the
standard paradigm of rationality constitute the substance of what has come to be
known as behavioural economics. Integrating behavioural economics into finance
is clearly a promising avenue for research.
A second group of critics questions the “rationality of expectations”. The
Rational Expectations Hypothesis (REH) assumes that economic agents have an
unbiased, statistically correct, view of the future. REH is not a consequence of
the classic Rationality Hypothesis, nor is the standard Rationality Hypothesis a
necessary ingredient of models fitting REH (Non-expected utility maximizers may
be given rational expectations). Hence this second axis is conceptually distinct
and broadly independent of the first one.
The project presented here focuses on the critique of REH, a critique which
applies to many areas of analysis, notably the study of financial markets and
the study of macroeconomics. Indeed, most theories in finance, as well as in
macroeconomics, have tended to adopt REH axiomatically. We believe that REH, in
its standard version, is a key ingredient of the excessive optimism that
economic theory currently conveys regarding the working of the financial system.
This excessive optimism has fuelled the excessive confidence in the self
regulating capabilities of the system, which, as is now argued by many, is at
the heart of its recent failures.
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