Work

Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments

Year: 2012

Type: article

Abstract: In recent “learning to forecast” experiments (Hommes et al. 2005), three different patterns in aggregate price behavior have been observed: slow monotonic convergence, permanent oscillations, and dampened fluctuations. We show that a simple model of individual learning can explain these different aggregate outcomes within the same experimental setting. The key idea is evolutionary selection among heterogeneous expectation rules, driven by their relative performance. The out-of-sample predictive power of our switching model is higher compared to the rational or other homogeneous expectations benchmarks. Our results show that heterogeneity in expectations is crucial to describe individual forecasting and aggregate price behavior. (JEL C53, C91, D83, D84, G12)

Source: American Economic Journal Microeconomics

DOI: 10.1257/mic.4.4.35

Authors: Mikhail Anufriev, Cars Hommes

Institutions: University of Technology Sydney, University of Amsterdam

Language: English

Topic: Economic theories and models

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funder: European Commission

Award: Monetary, Fiscal and Structural Policies with Heterogeneous Agents