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Learning In Cobweb Experiments

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  • HOMMES, CARS
  • SONNEMANS, JOEP
  • TUINSTRA, JAN
  • VAN DE VELDEN, HENK

Abstract

Different theories of expectation formation and learning usually yield different outcomes for realized market prices in dynamic models. The purpose of this paper is to investigate expectation formation and learning in a controlled experimental environment. Subjects are asked to predict the next period s aggregate price in a dynamic commodity market model with feedback from individual expectations. Subjects have no information about underlying market equilibrium equations, but can learn by observing past price realizations and predictions. We conduct a stable, an unstable, and a strongly unstable treatment. In the stable treatment, rational expectations (RE) yield a good description of observed aggregate price fluctuations: prices remain close to the RE steady state. In the unstable treatments, prices exhibit large fluctuations around the RE steady state. Although the sample mean of realized prices is close to the RE steady state, the amplitude of the price fluctuations as measured by the variance is significantly larger than the amplitude under RE, implying persistent excess volatility. However, agents forecasts are boundedly rational in the sense that fluctuations in aggregate prices are unpredictable and exhibit no forecastable structure that could easily be exploited.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 11 (2007)
Issue (Month): S1 (November)
Pages: 8-33

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Handle: RePEc:cup:macdyn:v:11:y:2007:i:s1:p:8-33_06

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  1. Hey, John D., 1994. "Expectations formation: Rational or adaptive or ...?," Journal of Economic Behavior & Organization, Elsevier, vol. 25(3), pages 329-349, December.
  2. Hugh Kelley & Daniel Friedman, 2002. "Learning to Forecast Price," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 556-573, October.
  3. repec:att:wimass:9530 is not listed on IDEAS
  4. Brock, W.A. & Hommes, C.H., 1996. "A Rational Route to Randomness," Working papers 9530r, Wisconsin Madison - Social Systems.
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  8. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October.
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