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

GATE WP 2003 – January 2020

60 Pages Posted: 24 Feb 2020 Last revised: 20 Apr 2020

See all articles by Muhammed Bulutay

Muhammed Bulutay

Technische Universität Berlin (TU Berlin)

Camille Cornand

Groupe d'Analyse et de Théorie Economique (GATE), CNRS, University of Lyon

Adam Zylbersztejn

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Date Written: January 28, 2020

Abstract

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 backward-looking 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.

Keywords: Strategic complementarities, expectations, adjustment speed, similarity-based learning, guessing games, heuristics switching

JEL Classification: C72, C73, D83, D84, D91, G41

Suggested Citation

Bulutay, Muhammed and Cornand, Camille and Zylbersztejn, Adam, Learning to Deal With Repeated Shocks Under Strategic Complementarity: An Experiment (January 28, 2020). GATE WP 2003 – January 2020, Available at SSRN: https://ssrn.com/abstract=3526851 or http://dx.doi.org/10.2139/ssrn.3526851

Muhammed Bulutay (Contact Author)

Technische Universität Berlin (TU Berlin) ( email )

Straße des 17
Juni 135
Berlin, 10623
Germany

Camille Cornand

Groupe d'Analyse et de Théorie Economique (GATE), CNRS, University of Lyon ( email )

93 Chemin des Mouilles
Ecully, 69130
France

Adam Zylbersztejn

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

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