Learning, forecasting and optimizing: An experimental study

Te Bao, John Duffy and Cars Hommes

European Economic Review, 2013, vol. 61, issue C, 186-204

Abstract: Rational Expectations (RE) models have two crucial dimensions: (i) agents on average correctly forecast future prices given all available information, and (ii) given expectations, agents solve optimization problems and these solutions in turn determine actual price realizations. Experimental tests of such models typically focus on only one of these two dimensions. In this paper we consider both forecasting and optimization decisions in an experimental cobweb economy. We report results from four main experimental treatments: (1) subjects form forecasts only, (2) subjects determine quantity only (solve an optimization problem), (3) they do both and (4) they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task. All treatments converge to Rational Expectation Equilibrium (REE), but at different speeds. We observe that performance is the best in treatment 1 and the worst in Treatment 3. We further find that most subjects use adaptive rules to forecast prices. Given a price forecast, subjects are less likely to make conditionally optimal production decisions in Treatment 3 where the forecast is made by themselves, than in Treatment 4 where the forecast is made by the other member of their team, which suggests that “two heads are better than one” in term of the speed of finding the REE.

Keywords: Learning; Rational expectations; Optimization; Experimental economics; Bounded rationality (search for similar items in EconPapers)
JEL-codes: C91 C92 D83 D84 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (84)

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Related works:
Working Paper: Learning, Forecasting and Optimizing: An Experimental Study (2012)
Working Paper: Learning, Forecasting and Optimizing: an Experimental Study (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:61:y:2013:i:c:p:186-204

DOI: 10.1016/j.euroecorev.2013.04.003

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