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Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles

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  • Ackert, Lucy F.
  • Charupat, Narat
  • Deaves, Richard
  • Kluger, Brian D.

Abstract

In 12 sessions conducted in a typical bubble-generating experimental environment, we design a pair of assets that can detect both irrationality and speculative behavior. The specific form of irrationality we investigate is the probability judgment error associated with low-probability, high-payoff outcomes. Independently, we test for speculation by comparing prices of identically paying assets in multiperiod versus single-period markets. We establish that aggregate irrationality measured in one dimension (probability judgment error) is associated with aggregate irrationality measured in another (bubble formation).

Suggested Citation

  • Ackert, Lucy F. & Charupat, Narat & Deaves, Richard & Kluger, Brian D., 2009. "Probability Judgment Error and Speculation in Laboratory Asset Market Bubbles," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(3), pages 719-744, June.
  • Handle: RePEc:cup:jfinqa:v:44:y:2009:i:03:p:719-744_99
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    Cited by:

    1. Asako, Yasushi & Funaki, Yukihiko & Ueda, Kozo & Uto, Nobuyuki, 2020. "(A)symmetric information bubbles: Experimental evidence," Journal of Economic Dynamics and Control, Elsevier, vol. 110(C).
    2. Cueva, Carlos & Rustichini, Aldo, 2015. "Is financial instability male-driven? Gender and cognitive skills in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 330-344.
    3. Michailova, Julija, 2010. "Overconfidence and bubbles in experimental asset markets," MPRA Paper 26388, University Library of Munich, Germany.
    4. Rosas-Martinez, Victor H., 2016. "On Monetary Policy, Unemployment, and Economic Growth," MPRA Paper 70980, University Library of Munich, Germany.
    5. Schoenberg, Eric J. & Haruvy, Ernan, 2012. "Relative performance information in asset markets: An experimental approach," Journal of Economic Psychology, Elsevier, vol. 33(6), pages 1143-1155.
    6. Rosas-Martinez, Victor H., 2016. "Expectations Over Durable Assets: How to Avoid the Formation of Value Bubbles," MPRA Paper 75350, University Library of Munich, Germany.
    7. Owen Powell & Natalia Shestakova, 2017. "The robustness of mispricing results in experimental asset markets," Vienna Economics Papers 1702, University of Vienna, Department of Economics.
    8. Stefan Palan, 2014. "A Software for Asset Market Experiments," Working Paper Series, Social and Economic Sciences 2014-01, Faculty of Social and Economic Sciences, Karl-Franzens-University Graz.
    9. 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.

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