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Evolutionary Selection of Expectations in Positive and Negative Feedback Markets

  • Anufriev, M.

    ()

    (Universiteit van Amsterdam)

  • Hommes, C.H.

    ()

    (University of Amsterdam)

  • Philipse, R.

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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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
Contact details of provider: 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
Web page: http://www.fee.uva.nl/cendef/
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