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Adaptive Expectations with Correction Bias: Evidence from the lab

Author

Listed:
  • Annarita COLASANTE

    () (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

  • Antonio PALESTRINI

    () (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

  • Alberto RUSSO

    () (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

  • Mauro GALLEGATI

    () (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)

Abstract

The present work analyzes the individual behavior in an experimental asset market in which the only task of each player is to predict the future price of an asset. To form their expectations, players see the past realization of the asset price in the market and the current information about the mean dividend and the interest rate. We investigate the mechanism of expectation formation in two di erent contexts: in the rst one the fundamental value is constant, while in the second the fundamental price increases over repetitions. The aim of this work is twofold: on the one hand, based on the nding of the recent literature about expectations, we investigate whether agents make their prediction according to adaptive expectation instead of rational one. On the other hand, we test the accuracy of the aggregate forecasts compared with the individual ones. Results show that there is heterogeneity both within and between groups. Agents follow adaptive rules to predict future prices and this implies that, in the majority of the cases, they coordinate on a price di erent from the fundamental value. We nd that there is a collective rationality instead of individual rationality. Indeed, each player makes systematic error forecast but, at the aggregate level, there are no signi cant forecasting errors in the case in which the fundamental value is constant. In the context of increasing fundamental value, players are able to capture the trend but they underestimate that value.

Suggested Citation

  • Annarita COLASANTE & Antonio PALESTRINI & Alberto RUSSO & Mauro GALLEGATI, 2015. "Adaptive Expectations with Correction Bias: Evidence from the lab," Working Papers 409, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  • Handle: RePEc:anc:wpaper:409
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    References listed on IDEAS

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    Cited by:

    1. Giovanni Dosi & Mauro Napoletano & Andrea Roventini & Joseph Stiglitz & Tania Treibich, 2017. "Rational Heuristics ? Expectations and behaviors in Evolving Economies with Heterogeneous interacting agents," Sciences Po publications 32, Sciences Po.

    More about this item

    Keywords

    Bounded rationality; Expectation; Experiments;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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