Alexey Tchernulitch is EUSP's Economic department alumni, now he represents the University of Technology Sydney.
Alexey will present a joint work with Mikhail Anufriev (University of Technology, Sydney / European University at St. Petersburg) and Jan Tuinstra (University of Amsterdam) - "Instability in a binary choice experiment with endogenous payoffs".
ABSTRACT
We run a switching experiment with endogenous payoffs. The experiment tests predictions of the seminal paper of Brock and Hommes (Econometrica, 1997) that showed that adaptive switching between rational and naive expectations in the cobweb model can generate instability and even chaos when cost of obtaining rational expectations is sufficiently high.
By running two treatments corresponding to low and high costs of rational expectations in the Brock-Hommes model, we find experimental confirmation of their results. Induced dynamics of the state variable is inherently unstable in the treatment with high cost, generating patterns of bubbles and crashes, but it is stable in the treatment with low cost. However, estimation of the Intensity of Choice parameter identified significant difference between treatments, suggesting that behaviour of participants may not be the same across treatments. By showing that the individual switching behavior is regime dependent, our results generalize a recent experimental study of Anufriev, Bao and Tuinstra (JEBO, 2016) to the situation with endogenous payoffs.