We present a model of inductive inference that includes, as special cases, Bayesian reasoning, case-based reasoning, and rulebased reasoning. This unified framework allows us to examine, positively or normatively, how the various modes of inductive inference can be combined and how their relative weights change endogenously. We establish conditions under which an agent who does not know the str...

We de…ne a …nancial system to be fragile if small shocks have disproportionately large e¤ects. In a model of …nancial intermediation, we show that small shocks to the demand for liquidity cause either high assetprice volatility or bank defaults or both. Furthermore, as the liquidity shocks become vanishingly small, the asset-price volatility is bounded away from zero. In the limit economy, with...

We present a model of inductive inference that includes, as special cases, Bayesian reasoning, case-based reasoning, and rulebased reasoning. This unified framework allows us to examine, positively or normatively, how the various modes of inductive inference can be combined and how their relative weights change endogenously. We establish conditions under which an agent who does not know the str...

We have first demonstrated that Debreu’s view regarding the publication of The Theory of Games and Economic Behavior by von Neumann and Morgenstern in 1944 as the birth of modern mathematical economics is not convincing. In this paper, we have proposed the hypothesis that the coordinated research programs in the 1930’s, initiated by the Econometric Society and the Cowles Commission for Research...

Economic theory reduces the concept of rationality to internal consistency. The practice of economics, however, distinguishes between rational and irrational beliefs. There is therefore an interest in a theory of rational beliefs, and of the process by which beliefs are generated and justified. We argue that the Bayesian approach is unsatisfactory for this purpose, for several reasons. First, t...

The topic of this paper immediately raises a serious methodological question: In what sense can we isolate the contribution of any individual or institution in the development of economic analysis? This is but one example of a fundamental logical problem that applies to the study of all history, that is, the difficulty of the counterfactual. For when you ask, “What is the influence of A (an eve...