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Thar she bursts - Reducing confusion reduces bubbles

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  • Michael Kirchler

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  • Juergen Huber

    ()

  • Thomas Stoeckl

    ()

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    Abstract

    To explore why bubbles frequently emerge in the experimental asset market model of Smith, Suchanek and Williams (1988), we vary the fundamental value process (constant or declining) and the cash-to-asset value-ratio (constant or increasing). We observe high mispricing in treatments with a declining fundamental value, while overvaluation emerges when coupled with an increasing C/A-ratio. A questionnaire reveals that the declining fundamental value process confuses subjects, as they expect the fundamental value to stay constant.Running the experiment with a different context (“stocks of a depletable gold mine” instead of “stocks”) significantly reduces mispricing and overvaluation as it reduces confusion.

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    File URL: http://eeecon.uibk.ac.at/wopec2/repec/inn/wpaper/2011-08.pdf
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    Bibliographic Info

    Paper provided by Faculty of Economics and Statistics, University of Innsbruck in its series Working Papers with number 2011-08.

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    Length: 37
    Date of creation: Mar 2011
    Date of revision:
    Handle: RePEc:inn:wpaper:2011-08

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    Keywords: Experimental economics; asset market; bubble; market efficiency; confusion;

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