Generalizing Heuristic Switching Models

Giorgos Galanis, Iraklis Kollias, Ioanis Leventidis and Joep Lustenhouwer

No 715, Working Papers from University of Heidelberg, Department of Economics

Abstract: The growing literature in behavioral finance and macroeconomics that uses dynamic discrete choice models has overwhelmingly assumed that individual choices are made on the basis of a logit framework. While this assumption allows for analytical tractability, it comes with a number of restrictions with regards to the economic environments it can represent. These restrictions are lifted if a probit framework is used instead. In this paper we compare the two approaches and show that, due to its ability to allow for correlations between the random part of different choice alternatives as well as random taste variation, the probit-based model can better fit actual choice data from an existing laboratory experiment, especially if there are more choice alternatives. On the other hand, for the case of two choice alternatives without random taste variation, the probit-based and logit-based models result in very similar dynamics. But even in that case, we find that important qualitative differences arise - in terms of an additional region of chaos - in the cobweb model of the seminal work of Brock and Hommes (1997). Our work highlights the usefulness of using the probit framework for extensions of existing theoretical models and as a way to better fit dynamic experimental or real world choice data.

Date: 2022-05-11
New Economics Papers: this item is included in nep-dcm and nep-exp
Note: This paper is part of http://archiv.ub.uni-heidelberg.de/volltextserver/view/schriftenreihen/sr-3.html
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://nbn-resolving.de/urn:nbn:de:bsz:16-heidok-316179 Frontdoor page on HeiDOK (text/html)
https://archiv.ub.uni-heidelberg.de/volltextserver ... t_al_2022_dp_715.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:awi:wpaper:0715

Access Statistics for this paper

More papers in Working Papers from University of Heidelberg, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Gabi Rauscher ( this e-mail address is bad, please contact ).