Overconfidence and Bubbles in Experimental Asset Markets
AbstractThis paper investigates the relationship between market overconfidence and occurrence of stock-price bubbles. Sixty participants traded stocks in ten experimental asset markets. Markets were constructed on the basis of subjects’ overconfidence, measured in pre-experimental sessions. The most overconfident subjects form “overconfident markets”, and the least overconfident subjects “rational markets”. Prices in rational markets tend to track the fundamental asset value more accurately than prices in overconfident markets and are significantly lower and less volatile. Additionally we observe significantly higher bubble measures and trading volume on overconfident markets. Altogether, our data provide evidence that overconfidence has strong effects on prices and trading behavior in experimental asset markets
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Bibliographic InfoPaper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1729.
Length: 35 pages
Date of creation: Sep 2011
Date of revision:
overconfidence; price bubbles; experimental asset market;
Other versions of this item:
- Michailova, Julija, 2010. "Overconfidence and bubbles in experimental asset markets," MPRA Paper 26388, University Library of Munich, Germany.
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-09-16 (All new papers)
- NEP-CBE-2011-09-16 (Cognitive & Behavioural Economics)
- NEP-EXP-2011-09-16 (Experimental Economics)
- NEP-FMK-2011-09-16 (Financial Markets)
- NEP-NEU-2011-09-16 (Neuroeconomics)
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