HOW FAST DO RATIONAL AGENTS LEARN

A simple dynamic model of rational learning through market interaction by asymmetrically informed risk-neutral agents, uncertain about a valuation parameter but whose pooled information reveals it, is presented. The model is a variation of the classical partial equilibrium model of learning in rational expectations in which the market price is informative about the unknown parameter only through the actions of agents. It is found that learning from market prices and convergence to the rational expectations equilibrium is slow, at the rate 1/square-root n1/3 (where n is the number periods of market interaction), whenever the average precision of private information in the market is finite. Convergence obtains at the standard rate 1/square-root n if there is a positive mass of perfectly informed agents. Comparative static results on more refined measures of the speed of convergence with respect to basic technological and informational parameters are also provided.