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Classroom Games: Speculation and Bubbles in an Asset Market

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  • Sheryl B. Ball
  • Charles A. Holt

Abstract

This paper describes a classroom exercise in which students trade assets of uncertain value in a sequence of market periods. Assets pay one-dollar dividends at the end of each period, but once the dividend is paid there is fixed probability that the asset will be destroyed. Dividends and probabilities are chosen so that the fundamental value is constant over time. Speculative bubbles can be caused by divergent expectations about other traders' valuations of the asset. This exercise provides an interactive framework that facilitates discussions of discounting, rational expectations, and backward induction.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.12.1.207
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 12 (1998)
Issue (Month): 1 (Winter)
Pages: 207-218

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Handle: RePEc:aea:jecper:v:12:y:1998:i:1:p:207-18

Note: DOI: 10.1257/jep.12.1.207
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  1. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
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Cited by:
  1. Larry Bensimhon & Yuri Biondi, 2013. "Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 3, pages 21-59, December.
  2. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2007. "Asset Bubbles without Dividends - An Experiment," Sonderforschungsbereich 504 Publications 07-01, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
  3. Noussair, C.N. & Powell, O.R., 2008. "Peaks and Valleys: Experimental Asset Markets With Non-Monotonic Fundamentals," Discussion Paper 2008-49, Tilburg University, Center for Economic Research.
  4. Maroš Servátka & George Theocharides, 2007. "Understanding Credit Risk: A Classroom Experiment," Working Papers in Economics 07/06, University of Canterbury, Department of Economics and Finance.
  5. Giovanni Giusti & Janet Hua Jiang & Yiping Xu, 2014. "Interest on Cash, Fundamental Value Process and Bubble Formation on Experimental Asset Markets," Working Papers 14-18, Bank of Canada.
  6. Calvin Blackwell, 2010. "Rational Expectations in the Classroom: A Learning Activity," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 10(2), pages 1-6, Fall.
  7. Charles Noussair & Stephane Robin & Bernard Ruffieux, 2001. "Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values," Experimental Economics, Springer, vol. 4(1), pages 87-105, June.
  8. Stefan Palan, 2013. "A Review of Research into Smith, Suchanek and Williams Markets," Working Paper Series, Social and Economic Sciences 2013-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
  9. Keser, Claudia & Markstädter, Andreas, 2014. "Informational asymmetries in laboratory asset markets with state-dependent fundamentals," Center for European, Governance and Economic Development Research Discussion Papers 207, University of Goettingen, Department of Economics.
  10. Powell, O.R., 2010. "Essays on experimental bubble markets," Open Access publications from Tilburg University urn:nbn:nl:ui:12-4219264, Tilburg University.

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