Learning, Forecasting and Optimizing: An Experimental Study

59 Pages Posted: 16 Feb 2012 Last revised: 13 May 2013

See all articles by Te Bao

Te Bao

Nanyang Technological University (NTU) - Division of Economics

John Duffy

University of California, Irvine

Cars H. Hommes

Government of Canada - Bank of Canada; CeNDEF, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute

Multiple version iconThere are 2 versions of this paper

Date Written: April 11, 2013

Abstract

Rational Expectations (RE) models have two crucial dimensions: agents correctly forecast future prices given all available information, and given expectations, agents solve optimization problems and these solutions in turn determine actual price realizations. Experimental testing of such models typically focuses on only one of these two dimensions. In this paper we consider both forecasting and optimization decisions in an experimental cobweb economy. We report results from four experimental treatments: subjects form forecasts only, subjects determine quantity only (solve an optimization problem), they do both and they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task. All treatments converges to Rational Expectation Equilibrium (REE), but the at very different speed. We observe that performance is the best in treatment and worst in the treatment. Most forecasters use an adaptive expectations rule. Subjects are less likely to make conditionally optimal production decision for given forecasts in treatment 3) where the forecast is made by themselves, than treatment 4) where the forecast is made by the other member of the team, which suggests that 'two heads are better than one' in finding REE.

Keywords: learning, rational expectations, optimization, experimental economics, bounded rationality

JEL Classification: C91, C92, D83, D84

Suggested Citation

Bao, Te and Duffy, John and Hommes, Cars H., Learning, Forecasting and Optimizing: An Experimental Study (April 11, 2013). European Economic Review, Vol. 61, 2013, Available at SSRN: https://ssrn.com/abstract=1956106 or http://dx.doi.org/10.2139/ssrn.1956106

Te Bao (Contact Author)

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

John Duffy

University of California, Irvine ( email )

Department of Economics
3151 Social Science Plaza
Irvine, CA 92697
United States
949-824-8341 (Phone)

Cars H. Hommes

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

CeNDEF, Amsterdam School of Economics, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://https://www.uva.nl/en/profile/h/o/c.h.hommes/c.h.hommes.html

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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