Learning Rational Expectations: The Finite State Case

Abstract

This paper is devoted to the question of whether traders can learn rational expectations from repeated observations of market data in a stationary environment with finitely many exogenous states of the world. The learning problem is placed in the context of an iterative adjustment process which achieves equilibrium if traders have rational expectations. The main result is that even if traders begin with no knowledge of their environment, there exists an estimation procedure which converges to rational expectations when the environment satisfies a certain regularity condition. The regularity condition is shown to be generic.