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Effect of Uncertainty about Others' Rationality in Experimental Asset Markets: An Experimental Analysis

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Author Info

  • Eizo Akiyama

    ()
    (Faculty of Engineering, Information and Systems, University of Tsukuba - University of Tsukuba)

  • Nobuyuki Hanaki

    ()
    (AMSE - Aix-Marseille School of Economics - Aix-Marseille Univ. - Centre national de la recherche scientifique (CNRS) - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Centrale Marseille (ECM))

  • Ryuichiro Ishikawa

    ()
    (Faculty of Engineering, Information and Systems, University of Tsukuba - University of Tsukuba)

Abstract

We investigate the extent to which price deviations from fundamental values in an experimental asset market are due to the uncertainty of subjects regarding others' rationality. We do so by comparing the price forecasts submitted by subjects in two market environments: (a) all six traders are human subjects (6H), and (b) one human subject interacts with five profit-maximizing computer traders who assume all the traders are also maximizing profit (1H5C). The subjects are told explicitly about the behavioral assumption of the computer traders (in both 6H and 1H5C) as well as which environment they are in. Results from our experiments show that there is no significant difference between the distributions of the initial deviations of the forecast prices from the fundamental values in the two markets. However, as subjects learn by observing the realized prices, the magnitude of deviations becomes significantly smaller in 1H5C than in 6H markets. We also conduct additional experiments where subjects who have experienced the 1H5C market interact with five inexperienced subjects. The price forecasts initially submitted by the experienced subjects follow the fundamental value despite the fact that the subjects are explicitly told that the five other traders in the market are inexperienced subjects. These findings do not support the hypothesis that uncertainty about others' rationality plays a major role in causing substantial deviation of forecast prices from the fundamental values in these asset market experiments.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00793613.

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Date of creation: Nov 2012
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Handle: RePEc:hal:wpaper:halshs-00793613

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Related research

Keywords: Rationality; Common knowledge; Experiment; Asset Markets; Computer Traders;

References

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  1. Jürgen Huber & Michael Kirchler, 2012. "The impact of instructions and procedure on reducing confusion and bubbles in experimental asset markets," Experimental Economics, Springer, Springer, vol. 15(1), pages 89-105, March.
  2. Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, American Finance Association, vol. 61(3), pages 1119-1157, 06.
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  5. Mikhail Anufriev & Cars Hommes, 2012. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 4(4), pages 35-64, November.
  6. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 831-59, July.
  7. Bao, T. & Hommes, C.H. & Sonnemans, J. & Tuinstra, J., 2010. "Individual Expectations, Limited Rationality and Aggregate Outcomes," CeNDEF Working Papers 10-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  8. Heemeijer, Peter & Hommes, Cars & Sonnemans, Joep & Tuinstra, Jan, 2009. "Price stability and volatility in markets with positive and negative expectations feedback: An experimental investigation," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(5), pages 1052-1072, May.
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  11. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, American Economic Association, vol. 95(5), pages 1731-1737, December.
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  14. Michael Kirchler & Jurgen Huber & Thomas Stockl, 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles," American Economic Review, American Economic Association, American Economic Association, vol. 102(2), pages 865-83, April.
  15. Nagel, Rosemarie, 1995. "Unraveling in Guessing Games: An Experimental Study," American Economic Review, American Economic Association, American Economic Association, vol. 85(5), pages 1313-26, December.
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Citations

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Cited by:
  1. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2013. "How Do Experienced Traders Respond to Inflows of Inexperienced Traders? An Experimental Analysis," Working Papers halshs-00920413, HAL.
  2. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2013. "It is Not Just Confusion! Strategic Uncertainty in an Experimental Asset Market," Working Papers halshs-00854513, HAL.
  3. Bao, Te & Duffy, John, 2014. "Adaptive vs. eductive learning: Theory and evidence," Research Report 14002-EEF, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  4. Bao, T. & Hommes, C.H. & Makarewicz, T.A., 2014. "Bubble Formation and (In)efficient Markets in Learning-to-Forecast and -Optimize Experiments," CeNDEF Working Papers 14-01, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

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