Heterogeneous beliefs and the non-linear cobweb model

This paper generalizes the evolutionary cobweb model with heterogeneous bel iefs of Brock and Hommes (1997. Econometrica 65, 1059-1095), to the case of non-linear demand and supply. Agents choose between a simple, freely avail able prediction strategy such as naive expectations and a sophisticated, co stly prediction strategy such as rational expectations, and update their be liefs according to an evolutionary 'fitness' measure such as past realized net profits, it is shown that, for generic non-linear, monotonic demand and supply curves, the evolutionary dynamics exhibits 'rational routes to rand omness', that is, bifurcation routes to strange attractors occur when the t raders' sensitivity to differences in evolutionary fitness increases. (C) 2 000 Elsevier Science B.V. All rights reserved. JEL classification. E32; C60 .