Long-Horizon Expectations: a lab experiment

Mardi | 2018-10-09
Salle des thèses 16h – 17h20

Isabelle SALLE – Cars HOMMES – Bruce MCGOUGH – George EVANS

We consider boundedly rational agents who do not plan over the infinite future but make trading plans at a finite, arbitrary horizon. We investigate the role of that horizon in the price dynamics of an asset in a Lucas tree model. We then design a laboratory experiment to confront our theoretical predictions to the behaviors of human subjects. Short-horizon markets may be prone to substantial deviations from the rational expectations. By contrast, markets populated by long-horizon forecasters converge towards the fundamental value, and a modest share of those is sufficient to ensure convergence. Longer-horizon forecasts display more heterogeneity, which prevents the coordination of subjects on wrong anchors or trends that is responsible for mispricing in short-horizon markets and favors adaptive learning that delivers convergence to the REE.