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)
"Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments."
American Economic Journal: Microeconomics,
Forecasting Models; Simulation Methods
Design of Experiments: Laboratory, Individual
Search; Learning; Information and Knowledge; Communication; Belief
Asset Pricing; Trading volume; Bond Interest Rates