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Heterogeneous Adaptive Expectations and Coordination in a Learning-to-Forecast Experiment

Listed author(s):
  • Colasante, Annarita
  • Palestrini, Antonio
  • Russo, Alberto
  • Gallegati, Mauro

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 different contexts: one with a constant fundamental value, and one in which the fundamental price increases over repetitions. Results show that there is heterogeneity both within and between Treatments. Considering an increasing fundamental value has no impact on the individual expectations but it increases the volatility of the market price. We investigate in depth the reasons behind the observed heterogeneity between groups in the same treatment and results show that the heterogeneity of players' expectations is the main cause of the heterogeneity in the realized price. Looking at the coordination, we find out that homogeneous expectations is not a sufficient condition to have high degree of coordination. We analyze the individual forecasting errors as a determinant of the coordination within group and results show that a positive and significant correlation between individual errors strongly influence the level of coordination.

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File URL: https://mpra.ub.uni-muenchen.de/66578/1/MPRA_paper_66578.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 66578.

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Date of creation: 11 Sep 2015
Handle: RePEc:pra:mprapa:66578
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  1. Lucas, Robert E, Jr & Prescott, Edward C, 1971. "Investment Under Uncertainty," Econometrica, Econometric Society, vol. 39(5), pages 659-681, September.
  2. Dwyer, Gerald P, Jr, et al, 1993. "Tests of Rational Expectations in a Stark Setting," Economic Journal, Royal Economic Society, vol. 103(418), pages 586-601, May.
  3. 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.
  4. Hommes,Cars, 2015. "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems," Cambridge Books, Cambridge University Press, number 9781107564978, October.
  5. Hommes,Cars, 2013. "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems," Cambridge Books, Cambridge University Press, number 9781107019294, October.
  6. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
  7. Marimon Ramon & Spear Stephen E. & Sunder Shyam, 1993. "Expectationally Driven Market Volatility: An Experimental Study," Journal of Economic Theory, Elsevier, vol. 61(1), pages 74-103, October.
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  10. Emile Grunberg & Franco Modigliani, 1954. "The Predictability of Social Events," Journal of Political Economy, University of Chicago Press, vol. 62, pages 465-465.
  11. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2005. "Coordination of Expectations in Asset Pricing Experiments," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 955-980.
  12. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
  13. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  14. Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan & Van De Velden, Henk, 2007. "Learning In Cobweb Experiments," Macroeconomic Dynamics, Cambridge University Press, vol. 11(S1), pages 8-33, November.
  15. Heemeijer, Peter & Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan, 2009. "Price stability and volatility in markets with positive and negative expectations feedback: An experimental investigation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1052-1072, May.
  16. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
  17. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
  18. 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.
  19. Alan Kirman, 2006. "Heterogeneity in Economics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 1(1), pages 89-117, May.
  20. Antonio Palestrini & Mauro Gallegati, 2015. "Unbiased Adaptive Expectation Schemes," Economics Bulletin, AccessEcon, vol. 35(2), pages 1185-1190.
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