As an empirical example, we discuss a behavioral asset pricing model with heterogeneous expectations. Bubble and crash dynamics is triggered by shocks to fundamentals and amplified by agents switching endogenously between a mean-reverting fundamental rule and a trend-following rule, based upon their relative performance. We also discuss learning-to-forecast laboratory experiments, showing that in positive feedback systems individuals coordinate expectations on non-rational, almost self-fulfilling equilibria with persistent price fluctuations very different from rational equilibria. Economic policy analysis may benefit enormously by focusing on efficiency and welfare gains in correcting mispricing along almost self-fulfilling equilibria.
Reflexivity, expectations feedback and almost self-fulfilling equilibria: economic theory, empirical evidence and laboratory experiments
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We discuss recent work on bounded rationality and learning in relation to Soros’ principle of reflexivity and stress the empirical importance of non-rational, almost self-fulfilling equilibria in positive feedback systems.
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- HOMMES Cars EconMethodSoros (pdf, 304.57 KB)
- C9 Design of Experiments
- C92 Laboratory, Group Behavior
- D8 Information, Knowledge, and Uncertainty
- D83 Search • Learning • Information and Knowledge • Communication • Belief • Unawareness†
- D84 Expectations • Speculations
- E3 Prices, Business Fluctuations, and Cycles
- E32 Business Fluctuations • Cycles