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The tension between chaotic behavior and perfect foresight was observed. Start with an equilibrium dynamics of a standard type derived from the hypot… - Kenneth Arrow
" "The tension between chaotic behavior and perfect foresight was observed. Start with an equilibrium dynamics of a standard type derived from the hypothesis that future prices are predicted perfectly. Suppose that the solution to the difference equations characterizing the solution exhibits chaotic behavior. Is it realistic to assume that the future, even though deterministic, is in fact predictable? Clearly, part of the lessons drawn by natural scientists, especially meteorologists, from nonlinear dynamics is precisely the opposite; chaotic behavior implies that small errors of observation in the starting position may lead to virtually total unpredictability after some period of time. This creates no difficulties of consistency when the predictor is not part of the system being predicted. But when the predictors are the economic agents being examined, there is a fundamental inconsistency. This epistemological antinomy is reinforced by the empirical observation that actual behavior of prices of assets such as securities could never reasonably have been predicted; if it had, there would have been much more buying or selling at earlier stages.
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About Kenneth Arrow
Kenneth Joseph Arrow (August 23, 1921 – February 21, 2017) was an American economist, who was Professor Emeritus of Economics in Stanford, and joint winner of the Nobel Memorial Prize in Economics with John Hicks in 1972.
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Kenneth Joseph Arrow
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Kenneth J. Arrow
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Ken Arrow
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Additional quotes by Kenneth Arrow
Because the costs of transmission are nonnegligible, even situations which are basically certain become uncertain for the individual; the typical economic agent simply cannot acquire in a meaningful sense the knowledge of all possible prices, even where they are each somewhere available. Markets are thus costly to use, and therefore the multiplication of markets, as for contingent claims as suggested above, becomes inhibited.
Unfortunately, the word 'learning' is a very general word. It isn't a very specific theory and we can have a lot of learning models, and it's unlikely that any one is going to track. When you talk about learning, you talk about the human mind adapting to conditions, and we haven't nailed that down very well. This is always an objection to the whole idea of bounded rationality. Not that it's wrong, but if it's right, it doesn't actually tell you what to do. Rationality is unique. That isn't really quite true, but at least under many circumstances it is. To say that we're not at the top of a hill gives you a lot of variety as to where you might be. So the problem with bounded rationality is not that it's wrong. On the contrary, I think it's very apt to be correct. It's just that its predictions are a lot more vague than those implied by rationality. At the moment, I don't know what to do about that.
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We don't have much time left. We are moving towards temperature increases of around two degrees Celsius, which is going to have consequences in the tropics, and we will lose things like glaciers. That's not a theory; it's happening right now. It's not a prediction; it's happening right now. But you just sightsee near those glaciers. But the glaciers are a big source of water. And on the questions of water, in California we store our water in a snowpack. When that's gone, the rain will be the same but it won't accumulate. With warming temperatures the snowpack will not work. It might be possible to substitute with dams, but that's complicated. This is conjoined with a big energy problem and I think that we really have to encourage development in this area. Just waiting for technological improvement won't work. We need to encourage it.
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