Heterogeneous Adaptive Expectations and Coordination in a Learning-to-Forecast Experiment

Colasante, Annarita and Palestrini, Antonio and Russo, Alberto and Gallegati, Mauro (2015): Heterogeneous Adaptive Expectations and Coordination in a Learning-to-Forecast Experiment.

Abstract

The present work analyzes the individual behavior in an experimental asset market in which the only task of each player is to predict the future price of an asset. To form their expectations, players see the past realization of the asset price in the market and the current information about the mean dividend and the interest rate. We investigate the mechanism of expectation formation in two different contexts: one with a constant fundamental value, and one in which the fundamental price increases over repetitions. Results show that there is heterogeneity both within and between Treatments. Considering an increasing fundamental value has no impact on the individual expectations but it increases the volatility of the market price. We investigate in depth the reasons behind the observed heterogeneity between groups in the same treatment and results show that the heterogeneity of players' expectations is the main cause of the heterogeneity in the realized price. Looking at the coordination, we find out that homogeneous expectations is not a sufficient condition to have high degree of coordination. We analyze the individual forecasting errors as a determinant of the coordination within group and results show that a positive and significant correlation between individual errors strongly influence the level of coordination.

• Item Type: MPRA Paper
• Language: English
• Keywords: Laboratory experiment, expectations, forecasting, heterogeneity, coordination.
• Subjects: C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C91 - Laboratory, Individual Behavior; C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C92 - Laboratory, Group Behavior; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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