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Non-Speculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality

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Author Info
Lei, V.
Noussair, C.
Plott, C.R.

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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 rationality.

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Publisher Info
Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1120.

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Length: 32 pages
Date of creation: Nov 1998
Date of revision:
Handle: RePEc:pur:prukra:1120

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Related research
Keywords: EXPERIMENTS FINANCIAL MARKET BUSINESS CYCLES

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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  1. Gunduz Caginalp & Vladimira Ilieva, 2006. "The dynamics of trader motivations in asset bubbles," Labsi Experimental Economics Laboratory University of Siena 008, University of Siena. [Downloadable!]
  2. Gadi Barlevy, 2007. "Economic theory and asset bubbles," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 44-59. [Downloadable!]
  3. Bossaerts, Peter & Plott, Charles, 2000. "Basic Principles Of Asset Pricing Theory: Evidence From Large-Scale Experimental Financial Markets," CEPR Discussion Papers 2578, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1731-1737, December. [Downloadable!]
  5. John Duffy & M. Utku Unver, 2003. "Asset Price Bubbles and Crashes with Near-Zero-Intelligence Traders: Towards an Understanding of Laboratory Findings," Computational Economics 0307001, EconWPA, revised 17 Mar 2004. [Downloadable!]
  6. Dufwenberg, Martin & Lindqvist, Tobias & Moore, Evan, 2003. "Bubbles and Experience: An Experiment on Speculation," Working Paper Series 588, Research Institute of Industrial Economics. [Downloadable!]
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  7. John Duffy & Eric O'N. Fisher, 2005. "Sunspots in the Laboratory," American Economic Review, American Economic Association, vol. 95(3), pages 510-529, June. [Downloadable!]
  8. Lucy F. Ackert & Bryan K. Church & Richard Deaves, 2002. "Bubbles in experimental asset markets: Irrational exuberance no more," Working Paper 2002-24, Federal Reserve Bank of Atlanta. [Downloadable!]
  9. Gary Charness & Uri Gneezy, 2003. "Portfolio Choice and Risk Attitudes: An Experiment," University of California at Santa Barbara, Economics Working Paper Series 12-03, Department of Economics, UC Santa Barbara. [Downloadable!]
  10. Joep Sonnemans & Peter Heemeijer & Cars Hommes, 2005. "Price expectations in the laboratory in positive and negative feedback systems," Computing in Economics and Finance 2005 165, Society for Computational Economics. [Downloadable!]
  11. Ernst Fehr & Jean-Robert Tyran, 2005. "Individual Irrationality and Aggregate Outcomes," Discussion Papers 05-09, University of Copenhagen. Department of Economics. [Downloadable!]
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  12. Lei, Vivian & Noussair, Charles & Plott, Charles R., 2002. "Asset Bubbles and Rationality: Additional Evidence from Capital Gains Tax Experiments," Working Papers 1137, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
  13. Lucy F. Ackert & Narat Charupat & Richard Deaves & Brian D. Kluger, 2006. "The origins of bubbles in laboratory asset markets," Working Paper 2006-06, Federal Reserve Bank of Atlanta. [Downloadable!]
  14. Martin Brown & Christian Zehnder, 2005. "Credit Registries, Relationship Banking and Loan Repayment," IEW - Working Papers iewwp240, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  15. Lugovskyy, Volodymyr & Puzzello, Daniela & Tucker, Steven, 2008. "An experimental investigation of overdissipation in the all pay auction," MPRA Paper 8604, University Library of Munich, Germany. [Downloadable!]
  16. Kevin J. Lansing, 2005. "Lock-in of extrapolative expectations in an asset pricing model," Working Papers in Applied Economic Theory 2004-06, Federal Reserve Bank of San Francisco. [Downloadable!]
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  17. Colin Camerer & Teck-Hua Ho & Juin Kuan Chong, 2003. "A cognitive hierarchy theory of one-shot games: Some preliminary results," Levine's Bibliography 506439000000000495, UCLA Department of Economics. [Downloadable!]
  18. Noussair, C.N. & Powell, O.R., 2008. "Peaks and Valleys: Experimental Asset Markets With Non-Monotonic Fundamentals," Discussion Paper 2008-49, Tilburg University, Center for Economic Research. [Downloadable!]
  19. Juin-Kuan Chong & Colin F. Camerer & Teck H. Ho, 2005. "A learning-based model of repeated games with incomplete information," Levine's Bibliography 666156000000000537, UCLA Department of Economics. [Downloadable!]
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  20. Ralf Becker & Urs Fischbacher & Thorsten Hens, . "Soft Landing of a Stock Market Bubble, An Experimental Study," IEW - Working Papers iewwp090, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  21. Jörg Oechssler & Carsten Schmidt & Wendelin Schnedler, 2007. "Asset Bubbles without Dividends - An Experiment," Working Papers 0439, University of Heidelberg, Department of Economics, revised Apr 2007. [Downloadable!]
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  22. Corgnet Bruce & Angela Sutan & Arvin Aashta, 2006. "The power of words in financial markets: soft versus hard communication,a strategy method experiment," Labsi Experimental Economics Laboratory University of Siena 006, University of Siena. [Downloadable!]
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