Price expectations in the laboratory in positive and negative feedback systems

Joep Sonnemans (), Peter Heemeijer () and Cars Hommes
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Peter Heemeijer: CeNDEF, Dep. of Quantitative Economics University of Amsterdam

No 165, Computing in Economics and Finance 2005 from Society for Computational Economics

Abstract: We analyse the results of a laboratory experiment on expectation formation. Participants were asked to predict prices in an artificial single-good economy, and were paid according to their forecasting accuracy. Thirteen markets, with six subjects each, were created, in two different treatments. The first treatment concerns a Cobweb-like commodity market with supply-driven expectations feedback. The second treatment concerns a speculative asset market with demanddriven expectations feedback. In the first treatment price fluctuations are relatively stable, quickly converging to the Rational Expectations fundamental value. In the second treatment prices do not converge quickly, but tend to display a slow oscillation around the fundamental price. An important factor in generating these differences is shown to be the strong coordination of price predictions among participants. This suggests a large degree of homogeneity in the expectation rules applied by the participants, which was confirmed by explicitly fitting the individual predictions to a linear adaptive autoregressive specification

Keywords: experimental economics; expectation formation; feedback (search for similar items in EconPapers)
JEL-codes: C91 C92 D84 (search for similar items in EconPapers)
Date: 2005-11-11
New Economics Papers: this item is included in nep-exp
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Citations: View citations in EconPapers (3)

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