Impulse balancing versus equilibrium learning an experimental study of competitive portfolio selection

The experiment lets investors interact in portfolio choices involving different risky assets, one for each state of the world. Probabilities of random states are commonly known. All assets pay the same dividend when their state is realized and becomes worthless otherwise. Whereas evolutionary stability and equilibrium behavior predict equal expected profits across assets, impulse balancing (Selten and Buchta, Games and human behavior: essays in the Honor of Amnon Rapoport, 1999) equalizes the expected regret. Thus, impulse balancing seems to capture tendencies of cyclical direction learning. In addition to analyzing whether and when behavior converges to impulse balancing or to equilibrium portfolios, we categorize portfolio adaptation by path dependence and sensitivity to state-specific probabilities. We show that portfolio choices are driven mainly by probability matching, but the effect becomes weaker over time. Furthermore, most portfolio adjustments are not compatible with directional learning.