Evolutionary Selection of Individual Expectations and Aggregate Outcomes
AbstractIn recent 'learning to forecast' experiments with human subjects (Hommes, et al. 2005), three different patterns in aggregate asset price behavior have been observed: slow monotonic convergence, permanent oscillations and dampened fluctuations. We construct a simple model of individual learning, based on performance based evolutionary selectionor reinforcement learning among heterogeneous expectations rules, explaining these different aggregate outcomes. Out-of-sample predictive power of our switching model is higher compared to the rational or other homogeneous expectations benchmarks. Our results show that heterogeneity in expectations is crucial to describe individual forecasting behavior as well as aggregate price behavior.
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Bibliographic InfoPaper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 09-09.
Date of creation: 2009
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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
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