Path dependent coordination of expectations in asset pricing experiments: A behavioral explanation

Anna Agliari, Cars Hommes and Nicolò Pecora

Journal of Economic Behavior & Organization, 2016, vol. 121, issue C, 15-28

Abstract: In the learning-to-forecast laboratory experiments in Hommes et al. (2005), three different types of aggregate asset price behavior have been observed: monotonic convergence to the stable fundamental steady state, dampened price oscillations and permanent price oscillations. We present a simple behavioral 2-type heuristics switching model explaining individual as well as aggregate behavior in the experiment. Based on relative performance, agents switch between a simple trend following and an anchor and adjustment heuristic that differ in how much weight is given to the long run average price level. The nonlinear switching model exhibits path dependence through co-existence of a locally stable fundamental steady state and a stable (quasi-)periodic orbit, created via a so-called Chenciner bifurcation. Depending on initial states, agents coordinate individual expectations either on a stable fundamental steady state path or on almost self-fulfilling persistent price fluctuations around the fundamental steady state.

Keywords: Multi-agent systems; Asset pricing model; Experimental economics; Coexistence of attractors; Expectation feedback (search for similar items in EconPapers)
JEL-codes: C62 C91 D84 E32 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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Working Paper: Path Dependent Coordination of Expectations in Asset Pricing Experiments: a Behavioral Explanation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:121:y:2016:i:c:p:15-28

DOI: 10.1016/j.jebo.2015.11.001

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