Dynamic Expectation Theory: Insights for Market Participants

Round 1

Reviewer 1 Report

the paper presents a new expectations theory, with dynamic update. In my opinion it is very interesting, and could open a new path in research.

The literature review is good, albeit incomplete. I think that it is necessary to explain the evolution of expectations theory in economics, and discuss other papers:

Lucas, Robert Jr. "Expectations and the Neutrality of Money"; Journal of Economic Theory 4 (2): 103-124. April, 1972.

Muth, John F. (1961). "Rational Expectations and the Theory of Price Movements" (PDF). Econometrica. 29 (3): 315–335. doi:10.2307/1909635. JSTOR 1909635.

McCloskey, Deirdre N. (1998). The Rhetoric of Economics (2 ed.). Univ of Wisconsin Press. p. 53. ISBN 978-0-299-15814-9.

Sargent, T; Cogley T. "Anticipated Utility And Rational Expectations As Approximations Of Bayesian Decision Making", International Economic Review, (February, 2008), Vol. 49(1), pp. 185-221.

Sargent, T; Hansen, L.P.  "Formulating and Estimating Dynamic Linear Rational Expectations Models,”, Journal of Economic Dynamics and Control, 2:1, Feb., 1980, p. 7-46.

 I also suggest the authors to discuss further how their theory enhances/complements/refutes prospect theory by Kahneman and co-workers. In particular these two papers:

Tversky, A., Kahneman, D. (1981). The Framing of Decisions and the Psychology of Choice. Science, New Series, Vol. 211, No. 4481. 453-458.

Kahneman, D. , Knetsch, J. (1991). Anomalies. The Endowment Effect, Loss Aversion, and Status Quo Bias. The Journal of Economic Perspectives, Vol. 5, No. 1. 193-206.

Author Response

Dear Referee,

 

thank you very much for your feedback and comments. I have included the literature as you have suggested.

In fact, two of your suggestions were already in the first paper version (Muth 1961 and Sargent, T; Cogley T 1980).

I have included the other references in my literature review, except the book by McCloskey, Deirdre N. (1998). The Rhetoric of Economics (2 ed.). Univ of Wisconsin Press. p. 53. ISBN 978-0-299-15814-9. Indeed, I know the JEL-Paper by McCloskey (1983). The Rhetoric of Economics, Journal of Economic Literature, Vol. 21(2), p. 481-517. From this reading, I do not see a direct linkage to my ideas in this research paper.

Attached I resubmit my paper. The major changes are highlighted in blue according to the feedback of the two referee reports. Thanks again for your excellent feedback.

Author Response File: Author Response.pdf

Reviewer 2 Report

Please find attached a pdf file containing the review report.

Comments for author File: Comments.pdf

Author Response

Dear Referee,

 

thank you very much for your feedback and comments. I have changed all points you highlighted. In addition, I checked the spelling and grammar.

Your comments about the function properties were help. I describe in my resubmit the function space and properties of all functions in detail. I have enhanced the Proof of Proposition 1 as you have recommended as well.

I explain in my resubmit the difference between the function K_i(t), which is a 3-dimensional vector function and the function K (in bold), which is a 4-D vector function K=(t,K_i(t))^T. The 4-D function K is dependent on the K_i(t), however, I do not use a subscript at K. In think, the clarifications might enhance the understanding of the reader. In short, K is not equal to (but dependent on) K_i(t)!

Attached I resubmit my paper. The major changes are highlighted in blue according to the feedback of two referee reports. Thanks again for your excellent feedback.

Author Response File: Author Response.pdf

Round 2

Reviewer 1 Report

The author's answer and corrections are fine for this reviewer.