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IS MORE MEMORY IN EVOLUTIONARY SELECTION (DE)STABILIZING?

  • Cars Hommes (a1), Tatiana Kiseleva (a1), Yuri Kuznetsov (a2) and Miroslav Verbic (a3)

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.

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Corresponding author

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

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