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

Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing... 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 ) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Microeconomics American Economic Association

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

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Publisher
American Economic Association
Copyright
Copyright © 2012 by the American Economic Association
Subject
Articles
ISSN
1945-7685
eISSN
1945-7685
DOI
10.1257/mic.4.4.35
Publisher site
See Article on Publisher Site

Abstract

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 )

Journal

American Economic Journal: MicroeconomicsAmerican Economic Association

Published: Nov 1, 2012

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