Template-Type: ReDIF-Paper 1.0 Series: Tinbergen Institute Discussion Papers Creation-Date: 2003-03-11 Number: 03-020/1 Author-Name: C.H. Hommes Author-Email: firstname.lastname@example.org Author-Workplace-Name: CeNDEF, Dept of Quantitative Economics, FEE, University of Amsterdam Author-Name: J.H. Sonnemans Author-Email: email@example.com Author-Workplace-Name: CREED, CeNDEF, Dept of Economics, FEE, University of Amsterdam Author-Name: J. Tuinstra Author-Email: firstname.lastname@example.org Author-Workplace-Name: CeNDEF, Dept of Quantitative Economics, FEE, University of Amsterdam Author-Name: H. van de Velde Author-Email: email@example.com Author-Workplace-Name: CeNDEF, Dept of Quantitative Economics, FEE, University of Amsterdam Title: Learning in Cobweb Experiments 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. Classification-JEL: C92; D84; E32. Keywords: expectations; learning; cobweb dynamics; excess volatility. File-Url: http://papers.tinbergen.nl/03020.pdf File-Format: application/pdf File-Size: 590191 bytes Handle: RePEc:tin:wpaper:20030020