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Heuristic Switching Model and Exploration-Explotation Algorithm to describe long-run expectations in LtFEs: A comparison

Author

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  • Annarita Colasante

    (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Simone Alfarano

    (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain)

  • Eva Camacho-Cuena

    (LEE and Department of Economics, Universitat Jaume I, Castellón, Spain)

Abstract

We compare the performance of two learning algorithms in replicating individual short and long-run expectations: the Exploration-Explotation Algorithm (EEA) and the Heuristic Switching Model (HSM). Individual expectations are elicited in a series of Learning-to-Forecast Experiments (LtFEs) with different feedback mechanisms between expectations and market price: positive and negative feedback markets. We implement the EEA proposed by Colasante et al. (2018c). Moreover, we modify the existing version of the HSM in order to incorporate the long-run predictions. Although the two algorithms provide a fairly good description of marker prices in the short- run, the EEA outperforms the HSM in replicating the main characteristics of individual expectation in the long-run, both in terms of coordination of individual expectations and convergence of expectations to the fundamental value.

Suggested Citation

  • Annarita Colasante & Simone Alfarano & Eva Camacho-Cuena, 2019. "Heuristic Switching Model and Exploration-Explotation Algorithm to describe long-run expectations in LtFEs: A comparison," Working Papers 2019/02, Economics Department, Universitat Jaume I, Castellón (Spain).
    • Handle: RePEc:jau:wpaper:2019/02
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    References listed on IDEAS

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    More about this item

    Keywords

    Expectations; Experiment; Evolutionary Learning;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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