Séminaire GREDEG : Cars HOMMES (University of Amsterdam)

Cars HOMMES is professor of Economic Dynamics at the University of Amsterdam​. He is well known for his influential work with William Brock (Econometrica 1997 and JEDC 1998), developing a behavioral theory of heterogeneous expectations and its applications to economics and finance.

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Title: Adaptive behaviour in the lab

Abstract
Lucas (1986) viewed the (in)stability of expectations as an experimentally testable hypothesis. We use learning-to-forecast experiments (LtFEs) to study the sta- bility of expectations in the lab in a multivariate setting. The (in)stability in the lab is characterized by the leading eigenvalues of the expectations feedback system. This empirical characterization, however, is different from what most learning theories would predict. Using a behavioral mixed heuristics switching model (HSM) calibrated to our LtFE we find an instability region inside the unit circle, with real or complex near unit root eigenvalues. Such experimental economies are unstable with subjects in the lab coordinating on trend-following behavior amplifying temporary bubbles and crashes.