Learning in Cobweb Experiments

Cars Hommes, Joep Sonnemans (), Jan Tuinstra and H. van de Velde ()
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H. van de Velde: CeNDEF, Dept of Quantitative Economics, FEE, University of Amsterdam

No 03-020/1, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: Different theories of expectation formation and learning usually yield different outcomes for realized market prices in dynamic models. The purpose of this paper is to investigate expectation formation and learning in a controlled experimental environment. Subjects are asked to predict the next period's aggregate price in a dynamic commodity market model with feedback from individual expectations. Subjects have no information about underlying market equilibrium equations, but can learn by observing past price realizations and predictions. We conduct a stable, an unstable, and a strongly unstable treatment. In the stable treatment, rational expectations (RE) yield a good description of observed aggregate price fluctuations: prices remain close to the RE steady state. In the unstable treatments, prices exhibit large fluctuations around the RE steady state. Although the sample mean of realized prices is close to the RE steady state, the amplitude of the price fluctuations as measured by the variance is significantly larger than the amplitude under RE, implying persistent excess volatility. However, agents' forecasts are boundedly rational in the sense that fluctuations in aggregate prices are unpredictable and exhibit no forecastable structure that could easily be exploited.

This discussion paper has resulted in a publication in Macroeconomic Dynamics , 2007, 11, Supplement S1, 8-33.

Keywords: expectations; learning; cobweb dynamics; excess volatility. (search for similar items in EconPapers)
JEL-codes: C92 D84 E32 (search for similar items in EconPapers)
Date: 2003-03-11
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: LEARNING IN COBWEB EXPERIMENTS (2007)
Journal Article: LEARNING IN COBWEB EXPERIMENTS (2007)
Working Paper: Learning in Coweb Experiments (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20030020

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