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Adaptive Interactive Profit Expectations and Small World Networks

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  • Bell, William Paul

Abstract

The aim of this paper is to simulate profit expectations as an emergent property using an agent based model. The paper builds upon adaptive expectations, interactive expectations and small world networks, combining them into a single adaptive interactive profit expectations model (AIE). Understanding the diffusion of interactive expectations is aided by using a network to simulate the flow of information between firms. The AIE model is tested against a profit expectations survey. The paper introduces “optimal calibration model averaging” and the “pressure to change profit expectations index” (px). Optimal calibration model averaging is an adaptation of “model averaging” to enhance the prediction performance of multiple equilibria models. The px is a subjective measure representing decision making in the face of uncertainty. The paper benchmarks the AIE model against the adaptive expectations model and the rational expectations hypothesis, finding the firms may have adequate memory although the interactive component of AIE model needs improvement. Additionally the paper investigates the efficacy of a tuneable network and equilibrium averaging. Finding the tuneable network produces widely spaced multiple equilibria and the optimal calibration model averaging enhances calibration but not prediction. Further research includes disaggregating the AIE model, using an input–output table to reflect the intensity of interaction between firms of different divisions, and supplementing optimal calibration model averaging with runtime weighted model averaging.

Suggested Citation

  • Bell, William Paul, 2008. "Adaptive Interactive Profit Expectations and Small World Networks," MPRA Paper 37924, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:37924
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    File URL: https://mpra.ub.uni-muenchen.de/38060/3/MPRA_paper_38060.pdf
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    References listed on IDEAS

    as
    1. Lovell, Michael C, 1986. "Tests of the Rational Expectations Hypothesis," American Economic Review, American Economic Association, vol. 76(1), pages 110-124, March.
    2. Bak, P. & Paczuski, M. & Shubik, M., 1997. "Price variations in a stock market with many agents," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 246(3), pages 430-453.
    3. Mark Bowden & Stuart McDonald, 2006. "Social interaction, herd behaviour and the formation of agent expectations," Computing in Economics and Finance 2006 178, Society for Computational Economics.
    4. John Foster & Burkhard Flieth, 2002. "Interactive expectations," Journal of Evolutionary Economics, Springer, vol. 12(4), pages 375-395.
    5. Clemen, Robert T., 1989. "Combining forecasts: A review and annotated bibliography," International Journal of Forecasting, Elsevier, vol. 5(4), pages 559-583.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Expectations; Interactive; Adaptive; Business cycle; Profit; Networks;

    JEL classification:

    • Z1 - Other Special Topics - - Cultural Economics
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty

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