Experiments on Expectations in Macroeconomics and Finance

Expectations play a crucial role in nance, macroeconomics, monetary economics and fiscal policy. In the last decade a rapidly increasing number of laboratory experiments have been performed to study individual expectation formation, the interactions of individual forecasting rules and the aggregate macro behavior they co-create. The aim of this chapter is to provide a comprehensive literature survey on laboratory experiments on expectations in macroeconomics and finance. In particular, we discuss the extent to which expectations are rational or may be described by simple forecasting heuristics, at the individual as well as the aggregate level.

[1]  C. Zanocco.  Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism , 2010 .

[2]  INFLATION EXPECTATIONS AND MONETARY POLICY DESIGN: EVIDENCE FROM THE LABORATORY , 2016, Macroeconomic Dynamics.

[3]  J. Sonnemans,et al.  Positive Expectations Feedback Experiments and Number Guessing Games as Models of Financial Markets , 2008 .

[4]  S. Sunder,et al.  Indeterminacy of Equilibria in a Hyperinflationary World: Experimental Evidence , 1993 .

[5]  Klaus Adam,et al.  Experimental Evidence on the Persistence of Output and Inflation , 2005, SSRN Electronic Journal.

[6]  R. Shiller,et al.  What Have They Been Thinking? Home Buyer Behavior in Hot and Cold Markets , 2012 .

[7]  Wei Xiong,et al.  Heterogeneous Expectations and Bond Markets , 2006 .

[8]  David M. Kreps,et al.  Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations , 1978 .

[9]  Frank Heinemann,et al.  Experiments on Monetary Policy and Central Banking , 2014 .

[10]  Oliver Kirchkamp,et al.  Why do monetary policies matter? An experimental study of saving and inflation in an overlapping generations model , 2000 .

[11]  William A. Brock,et al.  A rational route to randomness , 1997 .

[12]  C. Hommes,et al.  Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems , 2013 .

[13]  C. Hommes,et al.  Expectation formation in a cobweb economy, some one person experiments , 1998 .

[14]  V. Smith,et al.  Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets , 1988 .

[15]  Camille Cornand,et al.  DOES INFLATION TARGETING MATTER? AN EXPERIMENTAL INVESTIGATION , 2013, Macroeconomic Dynamics.

[16]  T. Sargent.  Bounded rationality in macroeconomics , 1993 .

[17]  Joep Sonnemans,et al.  UvA-DARE (Digital Academic Repository) Price stability and volatility in markets with positive and negative expectations feedback: an experimental investigation , 2007 .

[18]  Michele Bernasconi,et al.  Do fiscal variables affect fiscal expectations? Experiments with real world and lab data , 2009 .

[19]  C. Hommes,et al.  Individual Expectations, Limited Rationality and Aggregate Outcomes , 2011 .

[20]  Jean-Robert Tyran,et al.  Individual Irrationality and Aggregate Outcomes , 2005 .

[21]  David Laibson,et al.  What Goes Up Must Come Down? Experimental Evidence on Intuitive Forecasting. , 2013, The American economic review.

[22]  C. Hommes.  Behaviorally Rational Expectations and Almost Self-Fulfilling Equilibria , 2013 .

[23]  Douglas D. Davis,et al.  Nominal shocks in monopolistically competitive markets: An experiment , 2011 .

[24]  Douglas D. Davis,et al.  Nominal Price Shocks in Monopolistically Competitive Markets: An Experimental Analysis , 2011 .

[25]  Daniel Friedman,et al.  Learning to Forecast Price , 2002 .

[26]  Wolfgang J. Luhan,et al.  Information, Learning and Expectations in an Experimental Model Economy , 2013 .

[27]  Jeffrey Hales,et al.  Predicting the Next Step of a Random Walk: Experimental Evidence of Regime-Shifting Beliefs , 2001 .

[28]  M. Woodford.  Learning to Believe in Sunspots , 1990 .

[29]  J. Huber,et al.  Bubble measures in experimental asset markets , 2010 .

[30]  Domenico Massaro,et al.  Individual Expectations and Aggregate Macro Behavior , 2011 .

[31]  A. Tversky,et al.  Judgment under Uncertainty: Heuristics and Biases , 1974, Science.

[32]  C. Hommes,et al.  UvA-DARE ( Digital Academic Repository ) Reflexivity , expectations feedback and almost self-fulfilling equilibria : economic theory , empirical evidence and laboratory experiments , 2013 .

[33]  Joep Sonnemans,et al.  Coordination of Expectations in Asset Pricing Experiments , 2003 .

[34]  V. Smith,et al.  Research in Experimental Economics , 1979 .

[35]  R. Lucas.  Expectations and the neutrality of money , 1972 .

[36]  Andrew Schotter,et al.  An experimental study of belief learning using real beliefs , 1998 .

[37]  Alexander K. Koch,et al.  Belief elicitation in experiments: is there a hedging problem? , 2010 .

[38]  John D. Hey,et al.  Expectations formation: Rational or adaptive or...? , 1994 .

[39]  Charles R. Plott,et al.  Production, trade, prices, exchange rates and equilibration in large experimental economies , 2007 .

[40]  J. Tirole.  On the Possibility of Speculation under Rational Expectations , 1982 .

[41]  J. Bullard.  Learning Equilibria , 1991 .

[42]  R. Blank.  What Goes Up Must Come Down? Explaining Recent Changes in Public Assistance Caseloads , 1999 .

[43]  J. Potters,et al.  Cooperation in Experimental Games of Strategic Complements and Substitutes , 2006 .

[44]  David Colander,et al.  Beyond DSGE Models: Toward an Empirically Based Macroeconomics , 2008 .

[45]  D. Pfajfar,et al.  Experimental evidence on inflation expectation formation , 2014 .

[46]  C. Hommes,et al.  Learning, Forecasting and Optimizing: An Experimental Study , 2012 .

[47]  David Karjanen.  The Crash of 2008 and What It Means: The New Paradigm for Financial Markets , 2010 .

[48]  C. Noussair,et al.  Experimental Research on Asset Pricing , 2013 .

[49]  Raymond C. Battalio,et al.  Tests of rational expectations in a stark setting , 1989 .

[50]  R. Aumann,et al.  Unraveling in Guessing Games : An Experimental Study , 2007 .

[51]  Simon Gächter,et al.  The effects of (incentivized) belief elicitation in public goods experiments , 2010 .

[52]  A. Tversky,et al.  Judgment under Uncertainty , 1982 .

[53]  A. Schotter,et al.  Belief Elicitation in the Lab , 2013 .

[54]  C. Noussair,et al.  Traders' Expectations in Asset Markets: Experimental Evidence , 2007 .

[55]  A. Kirman.  Complex Economics: Individual and Collective Rationality , 2010 .

[56]  P. Grauwe.  Lectures on Behavioral Macroeconomics , 2012 .

[57]  Cars Hommes,et al.  PQ Strategies in Monopolistic Competition: Some Insights from the Lab , 2015 .

[58]  Jasmina Arifovic,et al.  The Behavior of the Exchange Rate in the Genetic Algorithm and Experimental Economies , 1996, Journal of Political Economy.

[59]  E. Akiyama,et al.  How Do Experienced Traders Respond to Inflows of Inexperienced Traders? An Experimental Analysis , 2013 .

[60]  M. Willinger,et al.  Guessing with negative feedback: An experiment , 2009 .

[61]  E. Prescott,et al.  Stationary solution to the overlapping generations model of fiat money: Experimental evidence , 1994 .

[62]  E. Fehr,et al.  Limited Rationality and Strategic Interaction - the Impact of the Strategic Environment on Nominal Inertia , 2007 .

[63]  J. Muth.  Rational Expectations and the Theory of Price Movements , 1961 .

[64]  Mauro Gallegati,et al.  Interaction and Market Structure , 2000 .

[65]  H. Simon,et al.  Models of Man, Social and Rational: Mathematical Essays on Rational Human Behavior in a Social Setting , 1957 .

[66]  Ramon Marimon,et al.  Expectations and learning under alternative monetary regimes: an experimental approach , 1994 .

[67]  G. Evans,et al.  Learning and expectations in macroeconomics , 2001 .

[68]  W. Branch.  The Theory of Rationally Heterogeneous Expectations: Evidence from Survey Data on Inflation Expectations , 2004 .

[69]  Cars Hommes,et al.  An Experimental Study on Expectations and Learning in Overlapping Generations Models , 2012 .

[70]  M. Rabin.  Inference by Believers in the Law of Small Numbers , 2000 .

[71]  Thomas Lux,et al.  THE FINANCIAL CRISIS AND THE SYSTEMIC FAILURE OF THE ECONOMICS PROFESSION , 2009 .

[72]  A. Rubinstein.  Instinctive and Cognitive Reasoning: A Study of Response Times , 2006 .

[73]  T. Bao,et al.  Adaptive vs. eductive learning : Theory and evidence , 2013 .

[74]  Robert Schmidt,et al.  Expectation formation in an experimental foreign exchange market , 2007, Central Eur. J. Oper. Res..

[75]  C. Noussair,et al.  Emotional State and Market Behavior , 2013 .

[76]  Steven R. Beckman,et al.  Forecasters as imperfect information processors: Experimental and survey evidence , 1997 .

[77]  Arlington Williams,et al.  The Formation of Price Forecasts in Experimental Markets , 1987 .

[78]  Cars Hommes,et al.  Evolutionary Selection of Individual Expectations and Aggregate Outcomes , 2012 .

[79]  Ramon Marimon,et al.  Expectationally-driven market volatility: An experimental study , 1993 .

[80]  P. Bossaerts,et al.  “Lucas” in the Laboratory , 2013 .

[81]  G. Soros.  The Alchemy of Finance , 1994 .

[82]  Ramon Marimon,et al.  Does a Constant Money Growth Rule Help Stabilize Inflation?: Experimental Evidence , 1995 .

[83]  Johannes Leitner,et al.  Expectation formation and regime switches , 2009 .

[84]  E. Elisabet Rutström,et al.  Stated beliefs versus inferred beliefs: A methodological inquiry and experimental test , 2009, Games Econ. Behav..

[85]  T. Sargent,et al.  Evolution and Procedures in Central Banking: Laboratory Experiments with an Expectational Phillips Curve , 2003 .

[86]  Cars Hommes,et al.  Expectations and Bubbles in Asset Pricing Experiments , 2008 .

[87]  M. Woodford,et al.  INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY , 2005, Macroeconomic Dynamics.

[88]  E. Fehr,et al.  Limited rationality and strategic interaction , 2002 .

[89]  Super-Exponential Bubbles in Lab Experiments: Evidence for Anchoring Over-Optimistic Expectations on Price , 2012 .

[90]  F.M. Fisher, A Priori Information and Time-series Analysis, Ams, 1962 , 1967 .

[91]  George Soros,et al.  The crash of 2008 and what it means : the new paradigm for financial markets , 2009 .

[92]  A. Schotter,et al.  Belief Elicitation in the Laboratory , 2014 .

[93]  C. Hommes,et al.  Evolutionary selection of expectations in positive and negative feedback markets , 2010 .

[94]  Steven P. Peterson.  Forecasting dynamics and convergence to market fundamentals: Evidence from experimental asset markets , 1993 .

[95]  M. Hashem Pesaran,et al.  The Limits to Rational Expectations , 1988 .

[96]  W. Brock,et al.  Heterogeneous beliefs and routes to chaos in a simple asset pricing model , 1998 .

[97]  Charles A. Holt,et al.  Price Bubbles with Discounting: A Web-Based Classroom Experiment , 2009 .

[98]  Susumu Koizumi.  A Priori Information and Time Series Analysis: A Review Article , 1964 .

[99]  R. Shiller.  Speculative Prices and Popular Models , 1990 .

[100]  Paul De Grauwe,et al.  Top-Down versus Bottom-Up Macroeconomics , 2010 .

[101]  John Duffy,et al.  Sunspots in the Laboratory , 2003 .

[102]  C. Noussair,et al.  Peaks and valleys : Price discovery in experimental asset markets with non-monotonic fundamentals , 2010 .

[103]  Cars Hommes,et al.  LEARNING IN COBWEB EXPERIMENTS , 2007, Macroeconomic Dynamics.

[104]  Richard Schmalensee,et al.  An Experimental Study of Expectation Formation , 1976 .

[105]  Ulrike Leopold-Wildburger,et al.  Some New Lotka-Volterra-Experiments , 1996 .

[106]  C. Hommes.  The heterogeneous expectations hypothesis: some evidence from the lab , 2010 .

[107]  Jon X. Eguia,et al.  Asset Pricing and Asymmetric Reasoning , 2013, Journal of Political Economy.

[108]  Michael Hertzel,et al.  Inference from Streaks in Random Outcomes: Experimental Evidence on Beliefs in Regime Shifting and the Law of Small Numbers , 2009, Manag. Sci..