Learning to deal with repeated shocks under strategic complementarity: An experiment

Abstract

Experimental evidence shows that the rational expectations hypothesis fails to characterize the path to equilibrium after an exogenous shock when actions are strategic complements. Under identical shocks, however, repetition allows adaptive learning, so that inertia in adjustment should fade away with experience. If this finding proves to be robust, inertia in adjustment may be irrelevant among experienced agents. The conjecture in the literature is that inertia would still persist, perhaps indefinitely, in the presence of real-world complications such as nonidentical shocks. Herein, we empirically test the conjecture that the inertia in adjustment is more persistent if the shocks are nonidentical. For both identical and nonidentical shocks, we find persistent inertia and similar patterns of adjustment that can be explained by backwardlooking expectation rules. A reformulation of naïve expectations with similarity-based learning approach is found to have a higher predictive power than rational and trend-following rules.

Trading and cognition in asset markets: An eye-tracking experiment

“…First, they could allow for richer structures of heterogeneity in strategies, including multiple types and switching heuristics. Such enriched taxonomy has been shown to perform well in describing the patterns of belief formation in markets (see, e.g., Hommes, 2021;Bulutay et al, 2022). Relatedly, the reason for the discrepancy between the hypothesized and the observed decisions may not be purely behavioral (e.g., due to the substantial heterogeneity in trading strategies, the role of trembles, or the presence of heuristic switching), but also cognitive: strategies may be also governed by the bottom-up processes in attention and information acquisition.…”