Path Dependent Coordination of Expectations in Asset Pricing Experiments: a Behavioral Explanation
Anna Agliari (),
Cars Hommes () and
N. Pecora ()
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N. Pecora: Catholic University, Piacenza
No 15-05, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance
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 orbits. 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.
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Journal Article: Path dependent coordination of expectations in asset pricing experiments: A behavioral explanation (2016)
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