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Classroom Games: Speculation and Bubbles in an Asset Market

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  • Sheryl B. Ball
  • Charles A. Holt

Abstract

This paper describes a classroom exercise in which students trade assets of uncertain value in a sequence of market periods. Assets pay one-dollar dividends at the end of each period, but once the dividend is paid there is fixed probability that the asset will be destroyed. Dividends and probabilities are chosen so that the fundamental value is constant over time. Speculative bubbles can be caused by divergent expectations about other traders' valuations of the asset. This exercise provides an interactive framework that facilitates discussions of discounting, rational expectations, and backward induction.

Suggested Citation

  • Sheryl B. Ball & Charles A. Holt, 1998. "Classroom Games: Speculation and Bubbles in an Asset Market," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 207-218, Winter.
  • Handle: RePEc:aea:jecper:v:12:y:1998:i:1:p:207-18
    Note: DOI: 10.1257/jep.12.1.207
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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.12.1.207
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    References listed on IDEAS

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    1. Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
    2. Vernon L. Smith, 1964. "Effect of Market Organization on Competitive Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 78(2), pages 181-201.
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    Cited by:

    1. repec:eee:eecrev:v:100:y:2017:i:c:p:72-94 is not listed on IDEAS
    2. 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.
    3. Sophie Moinas & Sébastien Pouget, 2016. "The bubble game: A classroom experiment," Southern Economic Journal, Southern Economic Association, vol. 82(4), pages 1402-1412, April.
    4. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2011. "On the ingredients for bubble formation: Informed traders and communication," Journal of Economic Dynamics and Control, Elsevier, vol. 35(11), pages 1831-1851.
    5. Larry Bensimhon & Yuri Biondi, 2013. "Financial Bubbles, Common Knowledge and Alternative Accounting Regimes: An Experimental Analysis of Artificial Spot Security Markets," The Japanese Accounting Review, Research Institute for Economics & Business Administration, Kobe University, vol. 3, pages 21-59, December.
    6. Oechssler, Jörg & Schmidt, Carsten & Schnedler, Wendelin, 2007. "Asset Bubbles without Dividends - An Experiment," Sonderforschungsbereich 504 Publications 07-01, Sonderforschungsbereich 504, Universität Mannheim;Sonderforschungsbereich 504, University of Mannheim.
    7. Keser, Claudia & Markstädter, Andreas, 2014. "Informational asymmetries in laboratory asset markets with state-dependent fundamentals," Center for European, Governance and Economic Development Research Discussion Papers 207 [rev.], University of Goettingen, Department of Economics.
    8. Giovanni Giusti & Janet Hua Jiang & Yiping Xu, 2014. "Interest on Cash, Fundamental Value Process and Bubble Formation on Experimental Asset Markets," Staff Working Papers 14-18, Bank of Canada.
    9. Charles Noussair & Stephane Robin & Bernard Ruffieux, 2001. "Price Bubbles in Laboratory Asset Markets with Constant Fundamental Values," Experimental Economics, Springer;Economic Science Association, vol. 4(1), pages 87-105, June.
    10. Thomas Stöckl & Jürgen Huber & Michael Kirchler, 2015. "Multi-period experimental asset markets with distinct fundamental value regimes," Experimental Economics, Springer;Economic Science Association, vol. 18(2), pages 314-334, June.
    11. Markstädter, Andreas & Keser, Claudia, 2014. "Informational Asymmetries in Laboratory Asset Markets with State Dependent Fundamentals," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100359, Verein für Socialpolitik / German Economic Association.
    12. Calvin Blackwell, 2010. "Rational Expectations in the Classroom: A Learning Activity," Journal for Economic Educators, Middle Tennessee State University, Business and Economic Research Center, vol. 10(2), pages 1-6, Fall.
    13. Claudia Keser & Andreas Markstädter, 2014. "Informational Asymmetries in Laboratory Asset Markets with State-Dependent Fundamentals," CIRANO Working Papers 2014s-30, CIRANO.
    14. Maroš Servátka & George Theocharides, 2011. "Understanding Credit Risk: A Classroom Experiment," The Journal of Economic Education, Taylor & Francis Journals, vol. 42(1), pages 79-86, January.
    15. Stefan Palan, 2013. "A Review of Research into Smith, Suchanek and Williams Markets," Working Paper Series, Social and Economic Sciences 2013-04, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    16. Keser, Claudia & Markstädter, Andreas, 2014. "Informational asymmetries in laboratory asset markets with state-dependent fundamentals," Center for European, Governance and Economic Development Research Discussion Papers 207, University of Goettingen, Department of Economics.

    More about this item

    JEL classification:

    • A22 - General Economics and Teaching - - Economic Education and Teaching of Economics - - - Undergraduate
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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