Adaptive Expectations with Correction Bias: Evidence from the lab

Annarita Colasante (), Antonio Palestrini (), Alberto Russo and Mauro Gallegati

No 409, Working Papers from Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali

Abstract: The present work analyzes the individual behavior in an experimental asset market in which the only task of each player is to predict the future price of an asset. To form their expectations, players see the past realization of the asset price in the market and the current information about the mean dividend and the interest rate. We investigate the mechanism of expectation formation in two di erent contexts: in the rst one the fundamental value is constant, while in the second the fundamental price increases over repetitions. The aim of this work is twofold: on the one hand, based on the nding of the recent literature about expectations, we investigate whether agents make their prediction according to adaptive expectation instead of rational one. On the other hand, we test the accuracy of the aggregate forecasts compared with the individual ones. Results show that there is heterogeneity both within and between groups. Agents follow adaptive rules to predict future prices and this implies that, in the majority of the cases, they coordinate on a price di erent from the fundamental value. We nd that there is a collective rationality instead of individual rationality. Indeed, each player makes systematic error forecast but, at the aggregate level, there are no signi cant forecasting errors in the case in which the fundamental value is constant. In the context of increasing fundamental value, players are able to capture the trend but they underestimate that value.

Keywords: Bounded rationality; Expectation; Experiments (search for similar items in EconPapers)
JEL-codes: C92 G12 G17 (search for similar items in EconPapers)
Pages: 38
Date: 2015-07
New Economics Papers: this item is included in nep-cbe and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:anc:wpaper:409

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