Asset Price Bubbles and Crashes with Near-Zero-Intelligence Traders: Towards an Understanding of Laboratory Findings
AbstractWe examine whether a simple agent--based model can generate asset price bubbles and crashes of the type observed in a series of laboratory asset market experiments beginning with the work of Smith, Suchanek and Williams (1988). We follow the methodology of Gode and Sunder (1993, 1997) and examine the outcomes that obtain when populations of zero-- intelligence (ZI) budget constrained, artificial agents are placed in the various laboratory market environments that have given rise to price bubbles. We have to put more structure on the behavior of the ZI-agents in order to address features of the laboratory asset bubble environment. We show that our model of "near--zero--intelligence" traders, operating in the same double auction environments used in several different laboratory studies, generates asset price bubbles and crashes comparable to those observed in laboratory experiments and can also match other, more subtle features of the experimental data.
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Date of creation: 01 Jul 2003
Date of revision: 17 Mar 2004
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Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-CFN-2003-07-13 (Corporate Finance)
- NEP-CMP-2003-07-13 (Computational Economics)
- NEP-EXP-2003-07-13 (Experimental Economics)
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