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Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles

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Author Info
Ackert, Lucy F.
Charupat, Narat
Deaves, Richard
Kluger, Brian D.

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Abstract

In 12 sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is the probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 44 (2009)
Issue (Month): 03 (June)
Pages: 719-744
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Handle: RePEc:cup:jfinqa:v:44:y:2009:i:03:p:719-744_99

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This page was last updated on 2009-12-14.

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