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Non-speculative bubbles in experimental asset markets: Lack of common knowledge of rationality vs. actual irrationality

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  • Noussair, C.N.

    (Tilburg University)

  • Lei , V.
  • Plott, C.

Abstract

We report the results of an experiment designed to study the role of speculation in the formation of bubbles and crashes in laboratory asset markets. In a setting in which speculation is not possible, bubbles and crashes are observed. The results suggest that the departures from fundamental values are not caused by the lack of common knowledge of rationality leading to speculation, but rather by behavior that itself exhibits elements of irrationality. Much of the trading activity that accompanies bubble formation, in markets where speculation is possible, is due to the fact that there is no other activity available for participants in the experiment.

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Bibliographic Info

Paper provided by Tilburg University in its series Open Access publications from Tilburg University with number urn:nbn:nl:ui:12-381105.

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Date of creation: 2001
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Publication status: Published in Econometrica (2001) v.69, p.831-859
Handle: RePEc:ner:tilbur:urn:nbn:nl:ui:12-381105

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Web page: http://www.tilburguniversity.edu/

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  1. Van Boening, Mark V. & Williams, Arlington W. & LaMaster, Shawn, 1993. "Price bubbles and crashes in experimental call markets," Economics Letters, Elsevier, vol. 41(2), pages 179-185.
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