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Evolutionary Selection of Expectations in Positive and Negative Feedback Markets

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  • Anufriev, M.

    ()
    (Universiteit van Amsterdam)

  • Hommes, C.H.

    ()
    (University of Amsterdam)

  • Philipse, R.

Abstract

An economic environment is a feedback system, where dynamics of aggregate variables depend on individual expectations and also shape them. The type of feedback mechanism is crucial for the aggregate outcome. Experiments with human subjects (Heemeijer et al, 2009) have shown that price converges to the fundamental level in the negative feedback environment but fails to do so under positive feedback. We present an explanation of these experimental results by means of a model of evolutionary switching between heuristics. Active heuristics are chosen endogenously, on the basis of their past performance. Under negative feedback an adaptive heuristic dominates explaining fast price convergence, whereas under positive feedback a trend-following heuristic dominates resulting in persistent price deviation and oscillations.

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Bibliographic Info

Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 10-05.

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Date of creation: 2010
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Handle: RePEc:ams:ndfwpp:10-05

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Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
Phone: + 31 20 525 52 58
Fax: + 31 20 525 52 83
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Web page: http://www.fee.uva.nl/cendef/
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References

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Citations

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Cited by:
  1. Giulio Bottazzi & Pietro Dindo, 2013. "Evolution and market behavior in economics and finance: introduction to the special issue," Journal of Evolutionary Economics, Springer, Springer, vol. 23(3), pages 507-512, July.
  2. Hommes, C.H., 2013. "Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 13-17, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Tiziana Assenza & William A. Brock & Cars H. Hommes, 2013. "Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts," Tinbergen Institute Discussion Papers 13-205/II, Tinbergen Institute.
  4. Cars Hommes, 2013. "Behaviorally Rational Expectations and Almost Self-Ful lling Equilibria," Tinbergen Institute Discussion Papers 13-204/II, Tinbergen Institute.
  5. Tiziana Assenza & William Brock & Cars Hommes, 2013. "Animal Spirits, Heterogeneous Expectations and the Emergence of Booms and Busts," DISCE - Working Papers del Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE) def7, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  6. Anufriev, M. & Hommes, C.H., 2011. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments (revised version of WP 09-09)," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 11-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  7. Grazzini, J., 2011. "Experimental Based, Agent Based Stock Market," CeNDEF Working Papers, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 11-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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