[HSO]

> Rational expectations and heterogeneous expectations don't conflict with each other.

Good point, although I didn't say they did. One can indeed view RE as a special case of heterogeneous expectations, and in fact that is essentially what I argue in a paper I am working on: That efficient markets are a region in the parameter space of more general market models, and that by traversing that parameter space one can generate different market outcomes. By way of illustration, take the public signal out of the above cited paper [1]. Without the coordination provided by the public signal the law of iterated expectations works again for the average expectations operator!

Regarding the source of heterogeneity, I don't agree with your citation of irrationality or biases. I am not an expert on behavioral economics but from what I understand, behavioral models seem very fragile to the insertion or presence of even a few rational agents, hence the need to erect "limits of arbitrage" by adding frictions, constraints, etc. It is possible to motivate heterogeneous expectations in a more robust way, see my reference [3] above and further references therein, for example. The basic idea is to generalize the economic system from ergodicity or even stationarity, so that heterogeneity is motivated epistemologically, rather than psychologically.