Competing Models

DOI10.1093/QJE/QJAC015zbMATH Open1501.91123arXiv1907.03809OpenAlexW4226377896MaRDI QIDQ5048764FDOQ5048764

Authors: José Luis Montiel Olea, Pietro Ortoleva, Mallesh Pai, Andrea Prat 

Publication date: 16 November 2022

Published in: The Quarterly Journal of Economics (Search for Journal in Brave)

Abstract: Different agents need to make a prediction. They observe identical data, but have different models: they predict using different explanatory variables. We study which agent believes they have the best predictive ability -- as measured by the smallest subjective posterior mean squared prediction error -- and show how it depends on the sample size. With small samples, we present results suggesting it is an agent using a low-dimensional model. With large samples, it is generally an agent with a high-dimensional model, possibly including irrelevant variables, but never excluding relevant ones. We apply our results to characterize the winning model in an auction of productive assets, to argue that entrepreneurs and investors with simple models will be over-represented in new sectors, and to understand the proliferation of "factors" that explain the cross-sectional variation of expected stock returns in the asset-pricing literature.

Full work available at URL: https://arxiv.org/abs/1907.03809

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Mathematics Subject Classification ID

Auctions, bargaining, bidding and selling, and other market models (91B26) Heterogeneous agent models (91B69)

Cited In (2)

• A model of parallel contests
• Competing Glauber and Kawasaki Dynamics

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