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Expectations and bubbles in asset pricing experiments

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  • Hommes, Cars
  • Sonnemans, Joep
  • Tuinstra, Jan
  • van de Velden, Henk

Abstract

We present results on expectation formation in a controlled experimental environment. In each period subjects are asked to predict the next price of a risky asset. The realized market price is derived from an unknown market equilibrium equation with feedback from individual forecasts. In most experiments prices deviate from the benchmark fundamental and bubbles emerge endogenously. These bubbles are inconsistent with rational expectations and seem to be driven by trend chasing behavior or "positive feedback expectations" of the participants. We also analyze individual predictions of participants and find that participants within a group tend to coordinate on a common prediction strategy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 67 (2008)
Issue (Month): 1 (July)
Pages: 116-133

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Handle: RePEc:eee:jeborg:v:67:y:2008:i:1:p:116-133

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