Generalizing Heterogeneous Dynamic Heuristic Selection
Ioanis Leventidis and
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Giorgos Galanis: School of Business and Management, Queen Mary, University of London; Centre for Research in Economic Theory and its Applications, University of Warwick
Iraklis Kollias: Department of Economics, University of Athens
Ioanis Leventidis: Department of Economics, University of Athens
Joep Lustenhouwer: Department of Economics, Heidelberg University
CRETA Online Discussion Paper Series from Centre for Research in Economic Theory and its Applications CRETA
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 dierent 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 dierences arise â€“ in terms of an additional region of chaos â€“ 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
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