Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/87568
Authors: 
Bao, Te
Hommes, Cars
Sonnemans, Joep
Tuinstra, Jan
Year of Publication: 
2012
Series/Report no.: 
Tinbergen Institute Discussion Paper 12-016/1
Abstract: 
Recent studies suggest that the type of strategic environment or expectation feedback can have a large impact on whether the market can learn the rational fundamental price. We present an experiment where the fundamental price experiences large unexpected shocks. Markets with negative expectation feedback (strategic substitutes) quickly converge to the new fundamental, while markets with positive expectation feedback (strategic complements) do not converge, but show under-reaction in the short run and over-reaction in the long run. A simple evolutionary selection model of individual learning explains these differences in aggregate outcomes.
Subjects: 
Expectation feedback
under- and overreaction
strategic substitutes and strategic complements
heuristic switching model
experimental economics
JEL: 
C92
G14
D84
D83
E37
Document Type: 
Working Paper

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