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Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments (revised version of WP 09-09)

  • Anufriev, M.

    ()

    (University of Amsterdam)

  • Hommes, C.H.

    ()

    (University of Amsterdam)

In recent `learning to forecast' experiments with human subjects (Hommes, et al. 2005), three different patterns in aggregate price behavior have been observed: slow monotonic convergence, permanent oscillations and dampened fluctuations. We show that a simple model of individual learning can explain these different aggregate outcomes within the same experimental setting. The key idea of the model is the evolutionary selection among heterogeneous expectation rules, driven by the relative performance of the rules. 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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Paper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 11-06.

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Date of creation: 2011
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Handle: RePEc:ams:ndfwpp:11-06
Contact details of provider: Postal: Dept. of Economics and Econometrics, Universiteit van Amsterdam, Roetersstraat 11, NL - 1018 WB Amsterdam, The Netherlands
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  1. Bao, Te & Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan, 2012. "Individual expectations, limited rationality and aggregate outcomes," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1101-1120.
  2. Peter Boswijk & Cars H. Hommes & Sebastiano Manzan, 2005. "Behavioral Heterogeneity in Stock Prices," Tinbergen Institute Discussion Papers 05-052/1, Tinbergen Institute.
  3. Andrea Gaunersdorfer & Cars Hommes & Florian O.O. Wagener, 2001. "Bifurcation Routes to Volatility Clustering," Tinbergen Institute Discussion Papers 01-015/1, Tinbergen Institute.
  4. Eva Carceles Poveda & Chryssi Giannitsarou, 2006. "Asset pricing with adaptive learning," Computing in Economics and Finance 2006 25, Society for Computational Economics.
  5. Laibson, David I. & Fuster, Andreas & Mendel, Brock, 2010. "Natural Expectations and Macroeconomic Fluctuations," Scholarly Articles 9938147, Harvard University Department of Economics.
  6. repec:att:wimass:9506 is not listed on IDEAS
  7. Klaus Adam, 2007. "Experimental Evidence on the Persistence of Output and Inflation," Economic Journal, Royal Economic Society, vol. 117(520), pages 603-636, 04.
  8. Marimon, R. & Spear, S. & Sunder, S., 1991. "Expectationally-Driven Market Volatility: An Experimental Study," GSIA Working Papers 1991-3, Carnegie Mellon University, Tepper School of Business.
  9. 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.
  10. Heemeijer, P. & Hommes, C.H. & Sonnemans, J. & Tuinstra, J., 2006. "Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation," CeNDEF Working Papers 06-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  11. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & van de Velden, Henk, 2008. "Expectations and bubbles in asset pricing experiments," Journal of Economic Behavior & Organization, Elsevier, vol. 67(1), pages 116-133, July.
  12. Bullard James, 1994. "Learning Equilibria," Journal of Economic Theory, Elsevier, vol. 64(2), pages 468-485, December.
  13. Assenza, T. & Heemeijer, P. & Hommes, C.H. & Massaro, D., 2011. "Individual Expectations and Aggregate Macro Behavior," CeNDEF Working Papers 11-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  14. 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.
  15. Peterson, Steven P., 1993. "Forecasting dynamics and convergence to market fundamentals : Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 22(3), pages 269-284, December.
  16. de Jong, Eelke & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2009. "Behavioural heterogeneity and shift-contagion: Evidence from the Asian crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1929-1944, November.
  17. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-59, July.
  18. William A. Brock & Cars H. Hommes, 1995. "Rational Routes to Randomness," Working Papers 95-03-029, Santa Fe Institute.
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