Abstract

http://ssrn.com/abstract=2007137
 
 

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Individual Expectations, Limited Rationality and Aggregate Outcomes


Te Bao


University of Groningen; University of Amsterdam - CeNDEF

Cars H. Hommes


University of Amsterdam - Amsterdam School of Economics (ASE)

Joep Sonnemans


University of Amsterdam - Amsterdam School of Economics (ASE)

Jan Tuinstra


University of Amsterdam - Department of Quantitative Economics (KE); Tinbergen Institute

February 16, 2012

Journal of Economic Dynamics and Control, Vol. 36, No. 8, 2012
Tinbergen Institute Discussion Paper No. 12-016/1

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 unexpected shocks. Markets with negative expectation feedback (strategic substitutes) quickly converge to the new fundamental, while markets with positive expectation feedback (strategic complements) do not converge, but show under-reaction in the short run and over-reaction in the long run. A simple evolutionary selection model of individual learning explains these differences in aggregate outcomes.

Number of Pages in PDF File: 45

Keywords: Expectation feedback, under- and over-reaction, strategic substitutes and strategic complements, heuristic switching model, experimental economics

JEL Classification: C92, G14, D84, D83, E37

Accepted Paper Series


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Date posted: February 18, 2012 ; Last revised: October 8, 2012

Suggested Citation

Bao, Te and Hommes, Cars H. and Sonnemans, Joep and Tuinstra, Jan, Individual Expectations, Limited Rationality and Aggregate Outcomes (February 16, 2012). Journal of Economic Dynamics and Control, Vol. 36, No. 8, 2012; Tinbergen Institute Discussion Paper No. 12-016/1. Available at SSRN: http://ssrn.com/abstract=2007137 or http://dx.doi.org/10.2139/ssrn.2007137

Contact Information

Te Bao (Contact Author)
University of Groningen ( email )
P.O. Box 800
9700 AH Groningen
Netherlands
University of Amsterdam - CeNDEF ( email )
Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands
Cars Hommes
University of Amsterdam - Amsterdam School of Economics (ASE) ( email )
Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)
Joep Sonnemans
University of Amsterdam - Amsterdam School of Economics (ASE) ( email )
Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31 20 525 4249 (Phone)
+31 20 525 5283 (Fax)
Jan Tuinstra
University of Amsterdam - Department of Quantitative Economics (KE) ( email )
Roetersstraat 11
Amsterdam, 1018 WB
Netherlands
Tinbergen Institute ( email )
Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
Feedback to SSRN


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