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Learning in Cobweb Experiments

Author

Listed:
  • C.H. Hommes

    () (CeNDEF, Dept of Quantitative Economics, FEE, University of Amsterdam)

  • J.H. Sonnemans

    () (CREED, CeNDEF, Dept of Economics, FEE, University of Amsterdam)

  • J. Tuinstra

    () (CeNDEF, Dept of Quantitative Economics, FEE, University of Amsterdam)

  • H. van de Velde

    () (CeNDEF, Dept of Quantitative Economics, FEE, University of Amsterdam)

Abstract

Different theories of expectation formation and learning usually yield different outcomes for realized market prices in dynamic models. The purpose of this paper is to investigate expectation formation and learning in a controlled experimental environment. Subjects are asked to predict the next period's aggregate price in a dynamic commodity market model with feedback from individual expectations. Subjects have no information about underlying market equilibrium equations, but can learn by observing past price realizations and predictions. We conduct a stable, an unstable, and a strongly unstable treatment. In the stable treatment, rational expectations (RE) yield a good description of observed aggregate price fluctuations: prices remain close to the RE steady state. In the unstable treatments, prices exhibit large fluctuations around the RE steady state. Although the sample mean of realized prices is close to the RE steady state, the amplitude of the price fluctuations as measured by the variance is significantly larger than the amplitude under RE, implying persistent excess volatility. However, agents' forecasts are boundedly rational in the sense that fluctuations in aggregate prices are unpredictable and exhibit no forecastable structure that could easily be exploited. This discussion paper has resulted in a publication in Macroeconomic Dynamics , 2007, 11, Supplement S1, 8-33.

Suggested Citation

  • C.H. Hommes & J.H. Sonnemans & J. Tuinstra & H. van de Velde, 2003. "Learning in Cobweb Experiments," Tinbergen Institute Discussion Papers 03-020/1, Tinbergen Institute.
  • Handle: RePEc:tin:wpaper:20030020
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    References listed on IDEAS

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    More about this item

    Keywords

    expectations; learning; cobweb dynamics; excess volatility.;

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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