We consider an environment in which traders with finite memory update their forecast rules at random intervals by OLS. In this context, overparameterization of the forecast rules can destabilize the learning dynamics. This instability tends to be attenuated by greater memory and less frequent...

Agents forming adaptive expectations generally make systematic mistakes. This characterization has fostered the rejection of adaptive expectations in macroeconomics. Experimental evidence, however, shows that in complex environments human subjects frequently rely on adaptive heuristics –...