Overconfidence and bubbles in experimental asset markets
AbstractIn this paper relationship between the market overconfidence and occurrence of the stock-prices’ bubbles is investigated. Sixty participants traded in ten experimental markets of the two types: rational and overconfident. Markets are constructed on the basis of subjects’ overconfidence, measured in the administered pre-experimental psychological test sessions. The most overconfident subjects form overconfident markets, and the least overconfident – rational markets. Empirical evidence presented in the paper refines differences between market outcomes in the experimental treatments and suggests the connection between market overconfidence and market outcomes. 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 than the average overconfident prices. Strong positive correlation between market outcomes and overconfidence measures draws conclusion, that an increase in market overconfidence is associated with the increase in average price and trading activity. Large and significant correlation between bubble measures and measures of overconfidence provide additional evidence that overconfidence has significant effect on price and trading behavior in experimental asset markets.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 26388.
Date of creation: 2010
Date of revision:
overconfidence; price bubbles; experimental asset market.;
Other versions of this item:
- Julija Michailova & Ulrich Schmidt, 2011. "Overconfidence and Bubbles in Experimental Asset Markets," Kiel Working Papers 1729, Kiel Institute for the World Economy.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-13 (All new papers)
- NEP-CBE-2010-11-13 (Cognitive & Behavioural Economics)
- NEP-EXP-2010-11-13 (Experimental Economics)
- NEP-NEU-2010-11-13 (Neuroeconomics)
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