Classroom Games: Speculation and Bubbles in an Asset Market
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.
Volume (Year): 12 (1998)
Issue (Month): 1 (Winter)
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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Sunder, S., 1992. "Experimental Asset Markets: A Survey," GSIA Working Papers 1992-19, Carnegie Mellon University, Tepper School of Business.
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