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
Date Written: January 28, 2020
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: Suggested Citation