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Evolutionary Selection of Forecasting and Quantity Decision Rules in Experimental Asset Markets

Author

Listed:
  • Jiahua Zhu

    (Department of Economics, Nanyang Technological University, Singapore)

  • Te Bao

    (Department of Economics, Nanyang Technological University, Singapore)

  • Wai Mun Chia

    (Department of Economics, Nanyang Technological University, Singapore)

Abstract

Bao etal.(2017) find that bubbles are less likely to emerge in experimental asset markets when subjects make price forecasts only(LearningtoForecast treatment, LtF) than when they make trading quantity decisions (Learning to Optimize treatment, LtO or both price forecasts and quantity decisions (mixed treatment). This paper provides two explanations for this difference. First, the subjects in the LtO and mixed treatment usually have a high intensity of choice parameter, which leads them to switch faster between the decision rules and a greater fraction of the population to choose the destabilizing strong trend-following rule. Second, the actual quantity decision may deviate substantially and persistently from the conditionally optimal level given the price forecasts in the mixed treatment, which amplifies the price deviation from thefundamental value. Our findings are helpful for understanding the root of financial bubbles and financial crisis, and designing policies to stabilize the market.

Suggested Citation

  • Jiahua Zhu & Te Bao & Wai Mun Chia, 2018. "Evolutionary Selection of Forecasting and Quantity Decision Rules in Experimental Asset Markets," Economic Growth Centre Working Paper Series 1807, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    • Handle: RePEc:nan:wpaper:1807
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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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