Macroeconomic Dynamics

Table of Contents - June 2012 - Volume 16, Issue 03  

Articles

IS MORE MEMORY IN EVOLUTIONARY SELECTION (DE)STABILIZING?

Cars Hommesa1 c1, Tatiana Kiselevaa1, Yuri Kuznetsova2 and Miroslav Verbica3

a1 University of Amsterdam

a2 Utrecht University

a3 University of Ljubljana

Abstract

We investigate the effects of memory on the stability of evolutionary selection dynamics based on a multinomial logit model in a simple asset pricing model with heterogeneous beliefs. Whether memory is stabilizing or destabilizing depends in general on three key factors: (1) whether or not the weights on past observations are normalized; (2) the ecology or composition of forecasting rules, in particular the average trend extrapolation factor and the spread or diversity in biased forecasts; and (3) whether or not costs for information gathering of economic fundamentals have to be incurred.

Keywords:

  • Fitness Measure;
  • Asset Pricing;
  • Bifurcations;
  • Evolutionary Selection;
  • Heterogeneous Beliefs;
  • Memory Strength

Correspondence:

c1 Address correspondence to: Cars Hommes, Roetersstraat 11, 1018WB Amsterdam, The Netherlands; e-mail: C.H.Hommes@uva.nl.