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RFS Advance Access published online on August 18, 2004
Review of Financial Studies, doi:10.1093/rfs/hhi003
Review of Financial Studies © The Society for Financial Studies 2004; all rights reserved
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Original Articles

Coordination of Expectations in Asset Pricing Experiments

Cars Hommes 1, Joep Sonnemans 1*, Jan Tuinstra 1, Henk van de Velden 1
1 CeNDEF, Department of Economics, University of Amsterdam

* To whom correspondence should be addressed. E-mail: j.h.sonnemans{at}uva.nl.


  Abstract

We investigate expectation formation in a controlled experimental environment. Subjects are asked to predict the price in a standard asset pricing model. They do not have knowledge of the underlying market equilibrium equations, but they know all past realized prices and their own predictions. Aggregate demand of the risky asset depends upon the forecasts of the participants. The realized price is then obtained from market equilibrium with feedback from six individual expectations. Realized prices differ significantly from fundamental values and typically exhibit oscillations around or slow convergence to this fundamental. In all groups participants coordinate on a common prediction strategy.


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