- Evolutionary selection of individual expectations and aggregate outcomes
- CeNDEF Working Paper University of Amsterdam
- Number of pages
- Universiteit van Amsterdam
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
In recent 'learning to forecast' experiments with human subjects (Hommes, et al. 2005), three different patterns in aggregate asset price behavior have been observed: slow monotonic convergence, permanent oscillations and dampened fluctuations. We construct a simple model of individual learning, based on performance based evolutionary selection
or reinforcement learning among heterogeneous expectations rules, explaining these different aggregate outcomes. Out-of-sample predictive power of our switching model is higher compared to the rational or other homogeneous expectations benchmarks. Our results show that heterogeneity in expectations is crucial to describe individual forecasting behavior as well as aggregate price behavior.
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