Individual expectations, limited rationality and aggregate outcomes

Bao, Te; Hommes, Cars; Sonnemans, Joep; Tuinstra, Jan

doi:10.1016/j.jedc.2012.03.006

Cited by 115 publications

(28 citation statements)

References 38 publications

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“…We refer to this period as the turning point of prices and compare it to the turning point in fundamentals, which is the analogous period for the fundamental value process [8].…”

Section: Peaks and Valleysmentioning

confidence: 99%

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Peaks and valleys

Noussair

Powell

2010

Journal of Economic Studies

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Purpose -This paper aims to study how the trajectory of fundamental values affects price discovery in an experimental asset market. Design/methodology/approach -An experiment is conducted with two treatments, in which the time path of fundamentals differs between treatments. In the peak treatment, fundamentals first rise and then fall, while in the valley treatment fundamentals first fall and then recover. The experiment allows market prices to be compared to fundamental values. Findings -Both peak and valley treatments experience bubbles when traders are inexperienced. However, price discovery is more rapid and complete in the peak than in the valley treatment. In the peak treatment, prices track the value, the direction of the trend, and changes in trend, more closely than in the valley treatment. Originality/value -This paper documents the first experimental results regarding pricing behavior in markets with non-monotonic fundamentals. It creates an environment (the valley treatment) in which convergence to close to fundamentals does not occur even with repetition of the market under identical conditions. The results demonstrate that the likelihood that an asset market tracks fundamentals depends on the time path of fundamentals.

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“…We refer to this period as the turning point of prices and compare it to the turning point in fundamentals, which is the analogous period for the fundamental value process [8].…”

Section: Peaks and Valleysmentioning

confidence: 99%

“…It is calculated by multiplying number of remaining tax payments by tax amount. 8. Average holding value.…”

mentioning

confidence: 99%

Peaks and valleys

Noussair

Powell

2010

Journal of Economic Studies

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“…Market 1 is the same in all treatments and similar to the market studied by Noussair et al, (2001) and Kirchler et al, (2012) in which the FV of the asset is constant over the entire life of the asset. In treatment T1 and T2, we introduce a FV shock in a way similar to Weber and Welfens, (2009), Bao et al, (2012) 5 , Corgnet et al, (2013) and Marquardt et al, (2019)). More precisely, market 2 involved a shock in period 8 on the FV which becomes either larger or lower compared to the pre-shock value.…”

Section: Experimental Designmentioning

confidence: 99%

“…Our experimental setting is close to the following studies. Weber and Welfens, (2009) consider a single trading period with an interruption in the middle to announce new 5 One of our treatments involves unexpected shocks as in the learning-to-forecast experiment of Bao et al, (2012). 6 T2 is the closest to the real stock market, where traders have often good or bad unexpected news about the value of their stock.…”

Section: Experimental Designmentioning

confidence: 99%

How do markets react to (un)expected fundamental value shocks? An experimental analysis

Bousselmi

Sentis

Willinger

2019

Journal of Behavioral and Experimental Finance

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We study experimentally the reaction of asset markets to fundamental value (FV) shocks. The pre-shock and post-shock FV are both constant, but after the shock the FV is either higher or lower than before. We compare treatments with expected shocks (the date and the magnitude are known in advance, but not the direction) to treatments with unexpected shocks (subjects only know that a shock may occur but are unaware of the date and the magnitude). We observe mispricing in markets without shocks and in markets with shocks. Shocks tend to reduce the post-shock price deviation and to increase the difference of opinions (DO), whatever the type of the shock (expected or unexpected) and its direction (upwards or downwards). In contrast to standard predictions, the larger DO after a shock is not accompanied by an increase in transaction volumes, but by sharp depression of share turnover.

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“…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.…”

Section: Introductionmentioning

confidence: 99%

Learning to deal with repeated shocks under strategic complementarity: An experiment

Bulutay

Cornand

Zylbersztejn

2022

Journal of Economic Behavior & Organization

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Experimental evidence shows that the rational expectations hypothesis fails to characterize the path to equilibrium after an exogenous shock when actions are strategic complements. Under identical shocks, however, repetition allows adaptive learning, so that inertia in adjustment should fade away with experience. If this finding proves to be robust, inertia in adjustment may be irrelevant among experienced agents. The conjecture in the literature is that inertia would still persist, perhaps indefinitely, in the presence of real-world complications such as nonidentical shocks. Herein, we empirically test the conjecture that the inertia in adjustment is more persistent if the shocks are nonidentical. For both identical and nonidentical shocks, we find persistent inertia and similar patterns of adjustment that can be explained by backwardlooking expectation rules. A reformulation of naïve expectations with similarity-based learning approach is found to have a higher predictive power than rational and trend-following rules.

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Individual expectations, limited rationality and aggregate outcomes

Cited by 115 publications

References 38 publications

Peaks and valleys

Peaks and valleys

How do markets react to (un)expected fundamental value shocks? An experimental analysis

Learning to deal with repeated shocks under strategic complementarity: An experiment

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