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Evolutionary selection of expectations in positive and negative feedback markets

Author

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  • Mikhail Anufriev
  • Cars Hommes

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  • 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

Suggested Citation

  • Mikhail Anufriev & Cars Hommes & Raoul Philipse, 2013. "Evolutionary selection of expectations in positive and negative feedback markets," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 663-688, July.
    • Handle: RePEc:spr:joevec:v:23:y:2013:i:3:p:663-688
    DOI: 10.1007/s00191-011-0242-4
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Agnès Festré & Pierre Garrouste, 2016. "Hayek on Expectations: The Interplay between two Complex Systems," GREDEG Working Papers 2016-13, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    2. 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.
    3. Annarita Colasante & Simone Alfarano & Eva Camacho-Cuena & Mauro Gallegati, 2017. "Long-run expectations in a Learning-to-Forecast Experiment: A Simulation Approach," Working Papers 2017/03, Economics Department, Universitat Jaume I, Castellón (Spain).
    4. repec:ctc:serie1:def7 is not listed on IDEAS
    5. repec:eme:rexezz:s0193-230620140000017002 is not listed on IDEAS
    6. Giovanni Dosi & Mauro Napoletano & Andrea Roventini & Joseph E. Stiglitz & Tania Treibich, 2017. "Rational Heuristics? Expectations and Behaviors in Evolving Economies with Heterogeneous Interacting Agents," LEM Papers Series 2017/31, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    7. repec:eee:gamebe:v:106:y:2017:i:c:p:188-208 is not listed on IDEAS
    8. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics,in: Experiments in Macroeconomics, volume 17, pages 11-70 Emerald Publishing Ltd.
    9. 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.
    10. 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.
    11. 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.
    12. Matteo G. Richiardi, 2017. "The Future of Agent-Based Modeling," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 43(2), pages 271-287, March.
    13. Mikhail Anufriev & Cars Hommes, 2012. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(4), pages 35-64, November.
    14. 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.

    More about this item

    Keywords

    Evolutionary learning; Expectations feedback; Experiments; D03; G12; D84; C91; C92;

    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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