1932
0
  1. Home
  2. A-Z Publications
  3. Annual Review of Economics
  4. Volume 6, 2014
  5. Article

Annual Review of Economics

Volume 6, 2014

Expectations in Experiments

Abstract

The rational expectations hypothesis is one of the cornerstones of current economic theorizing. This review discusses a number of experiments that focus on expectation formation by human subjects in a number of learning-to-forecast experiments and analyzes the implications for the rational expectations hypothesis. In these experiments, most agents are rational in an operational sense, and their expectations coordinate quickly, but not necessarily on the rational expectations value. In several situations, the homogeneous rational expectations hypothesis of Lucas and Prescott poorly describes the expectational dynamics and is outperformed by other hypotheses. But even in those situations in which the hypothesis gives a good description, it is more likely that coordination on rational values is brought about by the institutional structure of the market rather than the rationality of the agents.

Keyword(s): expectation formation, human subjects, laboratory experiments, rational expectations
Loading

Article metrics loading...

/content/journals/10.1146/annurev-economics-080213-040935
2014-08-02
2024-04-25
Loading full text...

Full text loading...

/deliver/fulltext/economics/6/1/annurev-economics-080213-040935.html?itemId=/content/journals/10.1146/annurev-economics-080213-040935&mimeType=html&fmt=ahah

Literature Cited

  1. Adam K, Marcet A. 2011. Internal rationality, imperfect market knowledge and asset prices. J. Econ. Theory 146:1224–52 [Google Scholar]
  2. Arrow KJ. 1986. Rationality of self and others in an economic system. J. Bus. 59:S385–99 [Google Scholar]
  3. Axelrod R. 1984. The Evolution of Cooperation New York: Basic
  4. Bao T, Duffy J, Hommes CH. 2013. Learning, forecasting and optimizing: an experimental study. Eur. Econ. Rev. 61:186–204 [Google Scholar]
  5. Bao T, Hommes CH, Sonnemans J, Tuinstra J. 2012. Individual expectations, limited rationality and aggregate outcomes. J. Econ. Dyn. Control 36:1101–20 [Google Scholar]
  6. Branch WA, Evans GW. 2010. Asset return dynamics and learning. Rev. Financ. Stud. 23:1651–80 [Google Scholar]
  7. Bray MM, Savin NE. 1986. Rational expectations equilibria, learning, and model specification. Econometrica 54:1129–60 [Google Scholar]
  8. Brock WA, Hommes CH. 1997. A rational route to randomness. Econometrica 65:1059–95 [Google Scholar]
  9. Brock WA, Hommes CH. 1998. Heterogeneous beliefs and routes to chaos in a simple asset pricing model. J. Econ. Dyn. Control 22:1235–74 [Google Scholar]
  10. Brock WA, Hommes CH, Wagener FOO. 2009. More hedging instruments may destabilize markets. J. Econ. Dyn. Control 33:1912–28 [Google Scholar]
  11. Evans GW, Honkapohja S. 1995. Adaptive learning and expectational stability: an introduction. Learning Rationality in Economics Kirman A, Salmon M. 102–26 Oxford: Basil Blackwell [Google Scholar]
  12. Friedman BM. 1979. Optimal expectations and the extreme information assumptions of “rational expectations” macromodels. J. Monet. Econ. 5:23–41 [Google Scholar]
  13. Guesnerie R. 1992. An exploration of the eductive justifications of the rational expectations hypothesis. Am. Econ. Rev. 82:1254–78 [Google Scholar]
  14. Guesnerie R. 2002. Anchoring economic predictions in common knowledge. Econometrica 70:439–80 [Google Scholar]
  15. Heemeijer P, Hommes CH, Sonnemans J, Tuinstra J. 2009. Price stability and volatility in markets with positive and negative expectations feedback: an experimental investigation. J. Econ. Dyn. Control 33:1052–72 [Google Scholar]
  16. Hirschman A. 1977. The Passions and the Interests Princeton, NJ: Princeton Univ. Press
  17. Hommes CH. 2011. The heterogeneous expectations hypothesis: some evidence from the lab. J. Econ. Dyn. Control 35:1–24 [Google Scholar]
  18. Hommes CH, Sonnemans J, Tuinstra J, van de Velden H. 2005. Coordination of expectations in asset pricing experiments. Rev. Financ. Stud. 18:955–80 [Google Scholar]
  19. Hommes CH, Sonnemans J, Tuinstra J, van de Velden H. 2007. Learning in cobweb experiments. Macroecon. Dyn. 11:Suppl. 18–33 [Google Scholar]
  20. Hommes CH, Sonnemans J, Tuinstra J, van de Velden H. 2008. Expectations and bubbles in asset pricing experiments. J. Econ. Behav. Organ. 67:116–33 [Google Scholar]
  21. Jaffé W. 1965. Correspondence of Léon Walras and Related Papers Vol. III Amsterdam: North-Holland
  22. Lei V, Noussair C, Plott C. 2001. Nonspeculative bubbles in experimental asset markets: lack of common knowledge of rationality vs. actual irrationality. Econometrica 69:831–59 [Google Scholar]
  23. Lucas RE. 1973. Some international evidence on output-inflation tradeoffs. Am. Econ. Rev. 63:326–34 [Google Scholar]
  24. Lucas RE, Prescott E. 1971. Investment under uncertainty. Econometrica 39:659–81 [Google Scholar]
  25. Lucas RE, Sargent TJ. 1979. After Keynesian macroeconomics. Fed. Reserve Bank Minneap. Q. Rev. 3:21–16 [Google Scholar]
  26. Marcet A, Sargent TJ. 1989. Convergence of least-squares learning in environments with hidden state variables and private information. J. Polit. Econ. 97:1306–22 [Google Scholar]
  27. Marimon R, Sunder S. 1994. Expectations and learning under alternative monetary regimes: an experimental approach. Econ. Theory 4:131–62 [Google Scholar]
  28. McCallum BT. 1976. Rational expectations and the natural rate hypothesis: some consistent estimates. Econometrica 44:43–52 [Google Scholar]
  29. Modigliani F. 1977. The monetarist controversy; or, should we forsake stabilization policies?. Am. Econ. Rev. 67:21–19 [Google Scholar]
  30. Muth J. 1961. Rational expectations and the theory of price movements. Econometrica 29:315–35 [Google Scholar]
  31. Sargent TJ. 1973. Rational expectations, the real rate of interest, and the natural rate of unemployment. Brookings Pap. Econ. Act. 4:429–80 [Google Scholar]
  32. Sargent TJ, Wallace N. 1975. “Rational” expectations, the optimal monetary instrument, and the optimal money supply rule. J. Polit. Econ. 83:241–54 [Google Scholar]
  33. Shaw GK. 1984. Rational Expectations Brighton: Harvester Wheatsheaf
  34. Sims CA. 1998. Stickiness. Carnegie-Rochester Conf. Ser. Public Policy 49:317–56 [Google Scholar]
  35. Sims CA. 2003. Implications of rational inattention. J. Monet. Econ. 50:665–90 [Google Scholar]
  36. Sims CA. 2005. Rational inattention: a research agenda. Tech. Rep., Volkswirtsch. Forsch. Dtsch. Bundesbank, Frankfurt
  37. Smith VL. 1991. Rational choice: the contrast between economics and psychology. J. Polit. Econ. 99:877–97 [Google Scholar]
  38. Smith VL, Suchanek GL, Williams AW. 1988. Bubbles, crashes, and endogenous expectations in experimental spot asset markets. Econometrica 56:1119–51 [Google Scholar]
  39. Sonnemans J, Hommes CH, Tuinstra J, van de Velden H. 2004. The instability of a heterogeneous cobweb economy: a strategy experiment on expectation formation. J. Econ. Behav. Organ. 54:453–81 [Google Scholar]
  40. Sonnemans J, Tuinstra J. 2010. Positive expectations feedback experiments and number guessing games as models of financial markets. J. Econ. Psychol. 31:964–84 [Google Scholar]
  41. Sunder S. 1995. Experimental asset markets: a survey. The Handbook of Experimental Economics Kagel J, Roth A. 445–500 Princeton, NJ: Princeton Univ. Press [Google Scholar]
  42. Tuinstra J, Wagener FOO. 2007. On learning equilibria. Econ. Theory 30:493–513 [Google Scholar]
  43. Turnovsky SJ. 1970. Empirical evidence on the formation of price expectations. J. Am. Stat. Assoc. 65:1441–54 [Google Scholar]
  44. Turnovsky SJ, Wachter ML. 1972. A test of the “expectations hypothesis” using directly observed wage and price expectations. Rev. Econ. Stat. 54:47–54 [Google Scholar]
  45. Woodford M. 2009. Information-constrained state-dependent pricing. J. Monet. Econ. 56:S100–24 [Google Scholar]
/content/journals/10.1146/annurev-economics-080213-040935
Loading
Expectations in Experiments
Annual Review of Economics 6, 421 (2014); https://doi.org/10.1146/annurev-economics-080213-040935
/content/journals/10.1146/annurev-economics-080213-040935
/content/journals/10.1146/annurev-economics-080213-040935
Loading

Data & Media loading...

  • Article Type: Review Article

Most Cited Most Cited RSS feed

This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error