Individual Expectations, Limited Rationality and Aggregate Outcomes

Abstract

Recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price. We present an experiment where the fundamental price experiences large un- JEL Classification: C92, G14, D84, D83, E37

1. Macroeconomics: A Survey of Laboratory Research

“…This literature imagines that agents are boundedly rational in the sense that they do not initially know the model (data generating process) and behave more as econometricians, using possibly miss-specified model specifications for their forecasting rules which they update in real-time as new data become available. In addition to the work of Sunder (1993, 1994), this real-time, adaptive expectations approach has been explored experimentally using the learning to forecast design by Bernasconi et al (2006), Hey (1994), Van Huyck et al (1994, Kelley and Friedman (2002), Hommes et al (2005Hommes et al ( , 2007, Heemeijer et al (2009) and Bao et al (2012Bao et al ( , 2013. The use of the learning to forecast methodology has become particularly important in assessing policy predictions using the expectations-based New Keynesian model of the monetary transmission mechanism in experimental studies by Adam (2007), Pfajfar and Zakelj (2013), Assenza et al (2013) and Petersen et al (2012), as will be discussed later in section 5.3 Hommes et al (2007) provides a good representative example of this literature.…”

“…Adams further notes that this miss-specification in agents' forecasts provides a further source of inflation and output persistence in addition to that implied by the model's assumption of sticky price adjustment, a finding that has been elaborated upon by Davis and Korenock (2011). Bao et al (2012) study learning behavior in a Cobweb model with a similar set-up to that of Hommes et al (2007). However, they compare the performance of the learning-to-forecast experimental design with the alternative, "learning-to-optimize" design where subjects in the role of suppliers must directly choose the quantity,    of the good they wish to bring to the market in period .…”

Information, Learning and Expectations in an Experimental Model Economy

“…Another heuristic is the anchoring‐and‐adjustment heuristic (Tversky and Kahneman ), which has been applied to model expectations in Bao et al . (). This heuristic might be a way to connect agents' inclination to use relatively simple rules of thumb with their desire to behave rationally, because it is more flexible than standard forms of extrapolative or adaptive expectations.…”

Learning to Deal With Repeated Shocks Under Strategic Complementarity: An Experiment

“…The role of the strategic environment has been further experimentally investigated in Learning-to-Forecast Experiments (LtFEs, Heemeijer et al 2009, Bao et al 2012, guessing games (Sutan and Willinger 2009, Cooper et al 2017, Hanaki et al 2019 and duopoly games (Potters and Suetens, 2009). 1 The main pattern emerging from these studies is that deviations from equilibrium tend to be larger and more persistent under strategic complementarity as compared to strategic substitutability.…”