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Evolutionary selection of expectations in positive and negative feedback markets

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  • Mikhail Anufriev
  • Cars Hommes

    ()

  • Raoul Philipse

Abstract

An economic environment is a feedback system, where the dynamics of aggregate variables depend on individual expectations and vice versa. The type of feedback mechanism is crucial for the aggregate outcome. Experiments with human subjects (Heemeijer et al., J Econ Dyn Control 33:1052–1072, 2009 ) have shown that price converges to the fundamental level in a 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 deviations and oscillations. Copyright The Author(s) 2013

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Article provided by Springer in its journal Journal of Evolutionary Economics.

Volume (Year): 23 (2013)
Issue (Month): 3 (July)
Pages: 663-688

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Handle: RePEc:spr:joevec:v:23:y:2013:i:3:p:663-688
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Keywords: Evolutionary learning; Expectations feedback; Experiments; D03; G12; D84; C91; C92;

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Find related papers by JEL classification:
  • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
  • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
  • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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  1. Anufriev, M. & Hommes, C.H., 2007. "Evolution of Market Heuristics," CeNDEF Working Papers 07-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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Cited by:

  1. repec:dgr:uvatin:20130204 is not listed on IDEAS
  2. 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 11-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  3. Hommes, Cars H., 2014. "Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria," Review of Behavioral Economics, now publishers, vol. 1(1-2), pages 75-97, January.
  4. Katarina Juselius & Katrin Assenmacher, 2014. "Real exchange rate persistence: the case of the Swiss franc-US dollar rate," Discussion Papers 14-26, University of Copenhagen. Department of Economics.
  5. repec:ctc:serie1:def7 is not listed on IDEAS
  6. Grazzini, J., 2011. "Experimental Based, Agent Based Stock Market," CeNDEF Working Papers 11-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  7. Giulio Bottazzi & Pietro Dindo, 2013. "Evolution and market behavior in economics and finance: introduction to the special issue," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 507-512, July.
  8. repec:dgr:uvatin:20130205 is not listed on IDEAS

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