Evolutionary Selection of Individual Expectations and Aggregate Outcomes

Mikhail Anufriev and C.H. Hommes ()
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C.H. Hommes: University of Amsterdam

No 09-09, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

Abstract: In recent 'learning to forecast' experiments with human subjects (Hommes, et al. 2005), three different patterns in aggregate asset price behavior have been observed: slow monotonic convergence, permanent oscillations and dampened fluctuations. We construct a simple model of individual learning, based on performance based evolutionary selectionor reinforcement learning among heterogeneous expectations rules, explaining these different aggregate outcomes. 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 behavior as well as aggregate price behavior.

Date: 2009
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:ams:ndfwpp:09-09

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