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- Private Experience In Adaptive Learning Models

  • Felipe Pérez

    (Universidad de Alicante)

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    Here I provide a model that gives some insights regarding questions about actual economic behavior. I take as a source for stylized facts the experiments conducted by Marimón and Sunder as reported in Econometrica, 1993, in which it is shown that people initially do not behave according to the rational expectations assumption, but eventually learn to do so. I propose a slight generalization of the adaptive learning model in order to explain, besides the long run equilibrium observed, the stochastic-like time paths in the aggregate variables. In fact, the introduction of heterogeneity in private experience accumulated over time in a simple adaptive model with fixed decision rules shown is shown to be necessary and sufficient to generate the complex kind of dynamics present in the experiments. In our version of the Marcet- Sargent OLS model, people can not be using useful public information available, but only private experience instead, when they do price forecasting. Otherrwise, we would not be able to explain the data with this model. This result sheds light on the experimental results, in the sense of suggesting a stronger degree of bounded rationality in experimental subjects. In addition, I provide examples within the proposed environment that improve upon the explanatory power of existing adaptive learning models.

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    File Function: Fisrt version / Primera version, 1998
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    Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 1998-03.

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    Length: 32 pages
    Date of creation: Feb 1998
    Date of revision:
    Publication status: Published by Ivie
    Handle: RePEc:ivi:wpasad:1998-03
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    1. E. Kalai & E. Lehrer, 2010. "Rational Learning Leads to Nash Equilibrium," Levine's Working Paper Archive 529, David K. Levine.
    2. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
    3. Lucas, Robert E, Jr, 1986. "Adaptive Behavior and Economic Theory," The Journal of Business, University of Chicago Press, vol. 59(4), pages S401-26, October.
    4. Anderson, Matthew J. & Sunder, Shyam, 1995. "Professional Traders as Intuitive Bayesians," Organizational Behavior and Human Decision Processes, Elsevier, vol. 64(2), pages 185-202, November.
    5. Ehud Kalai & Ehud Lehrer, 1990. "Merging Economic Forecasts," Discussion Papers 1035, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Kalai, Ehud & Lehrer, Ehud, 1993. "Subjective Equilibrium in Repeated Games," Econometrica, Econometric Society, vol. 61(5), pages 1231-40, September.
    7. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December.
    8. Ramon Marimon & Shyam Sunder, 1993. "Indeterminacy of equilibria in a hyperinflationary world: Experimental evidence," Economics Working Papers 25, Department of Economics and Business, Universitat Pompeu Fabra.
    9. Woodford, Michael, 1986. "Learning to Believe in Sunspots," Working Papers 86-16, C.V. Starr Center for Applied Economics, New York University.
    10. Bray, Margaret, 1982. "Learning, estimation, and the stability of rational expectations," Journal of Economic Theory, Elsevier, vol. 26(2), pages 318-339, April.
    11. Simon, Herbert A, 1986. "Rationality in Psychology and Economics," The Journal of Business, University of Chicago Press, vol. 59(4), pages S209-24, October.
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