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The aim of the present work is to shed light on the extensive debate about expectations in financial market. We analyze the behavior of subjects in an experimental environment in which it is possible to directly observe expectations since the sole task of each player is to predict the future price of an asset. We investigate the mechanism of expectation formation in two different contexts: in the first, the fundamental value is constant; in the second, the fundamental price increases over repetitions. First of all we observe if, according to the main results shown in Palestrini and Gallegati (2015), there is a convergence to the rational equilibrium even if agents have adaptive expectations. Moreover, we concentrate on the accuracy of aggregate forecasts compared with the individual forecasts. We find that there is collective rationality instead of individual rationality. In the context of increasing fundamental value, contrary to the theoretical predictions, players are able to capture the trend but they underestimate that value. This implies that if all agents make their forecasts according to an adaptive scheme, there is no full convergence to the rational expectations equilibrium.
From:
Annarita Colasante
Antonio Palestrini
Alberto Russo
Mauro Gallegati
Universit`a Politecnica delle Marche
The aim of the present work is to shed light on the extensive debate about expectations in financial market. We analyze the behavior of subjects in an experimental environment in which it is possible to directly observe expectations since the sole task of each player is to predict the future price of an asset. We investigate the mechanism of expectation formation in two different contexts: in the first, the fundamental value is constant; in the second, the fundamental price increases over repetitions. First of all we observe if, according to the main results shown in Palestrini and Gallegati (2015), there is a convergence to the rational equilibrium even if agents have adaptive expectations. Moreover, we concentrate on the accuracy of aggregate forecasts compared with the individual forecasts. We find that there is collective rationality instead of individual rationality. In the context of increasing fundamental value, contrary to the theoretical predictions, players are able to capture the trend but they underestimate that value. This implies that if all agents make their forecasts according to an adaptive scheme, there is no full convergence to the rational expectations equilibrium.
From:
Annarita Colasante
Antonio Palestrini
Alberto Russo
Mauro Gallegati
Universit`a Politecnica delle Marche