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Learning in a Complex World: Insights from an OLG Lab Experiment

Author

Listed:
  • Cars Hommes
  • Stefanie J. Huber
  • Daria Minina
  • Isabelle Salle
Abstract
This paper brings novel insights into group coordination and price dynamics in complex environments. We implement an overlapping-generation model in the lab where output dynamics are given by the well-known chaotic quadratic map. This model structure allows us to study previously unexplored parameter regions where perfect-foresight dynamics exhibit chaotic dynamics. This paper highlights three key findings. First, the price converges to the simplest equilibria, namely either the monetary steady state or the two-cycle in all markets. Second, we document a novel and intriguing finding: a non-monotonicity of the behavior when complexity increases. Convergence to the two-cycle occurs for the intermediate parameter range, while the extreme scenarios of both a simple, stable two-cycle and highly nonlinear dynamics (chaos) lead to coordination on the steady state in the lab. All indicators of coordination and convergence significantly exhibit this non-monotonic relationship in the learning-to-forecast experiments. This finding also persists in the learning-to-optimize design. Finally, convergence in the learning-to-optimize experiment is more challenging to achieve: coordination on the two-cycle is never observed, although the two-cycle Pareto dominates the steady state.

Suggested Citation

  • Cars Hommes & Stefanie J. Huber & Daria Minina & Isabelle Salle, 2023. "Learning in a Complex World: Insights from an OLG Lab Experiment," Staff Working Papers 23-13, Bank of Canada.
    • Handle: RePEc:bca:bocawp:23-13
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    References listed on IDEAS

    as
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    23. Arifovic, Jasmina & Hommes, Cars & Salle, Isabelle, 2019. "Learning to believe in simple equilibria in a complex OLG economy - evidence from the lab," Journal of Economic Theory, Elsevier, vol. 183(C), pages 106-182.
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    More about this item

    Keywords

    Business fluctuations and cycles; Economic models;

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E70 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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