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Expectation Formation in Finance and Macroeconomics: A Review of New Experimental Evidence

T. Bao,C. Hommes,Jiaoying Pei

Published 2021 in Social Science Research Network

ABSTRACT

This paper reviews the recent development and new findings of the literature on learning to forecast experiments (LtFEs). In general, the stylized finding in the typical LtFEs, namely the rapid convergence to the rational expectations equilibrium in negative feedback markets and persistent bubbles and crashes in positive feedback markets, is a robust result against several deviations from the baseline design (e.g., number of subjects in each market, price prediction versus quantity decision, short term versus long term predictions, predicting price or returns). Recent studies also find a high level of consistency between findings from forecasting data from the laboratory and the field, and forecasting accuracy crucially depends on the complexity of the task.

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