Who inflates the bubble? Forecasters and traders in experimental asset markets

We use a laboratory experiment to study how forecasting contributes to mispricing. In the Baseline, we assign both the task of forecasting and the task of trading to the same subject. In treatment SamePay, we separate these tasks and assign them to two different subjects, who share the profits from trade. In treatment Accuracy, we pay forecasters according to the accuracy of their forecasts. We find that the separation of tasks induces some mispricing. Even worse, paying for accuracy reduces attention towards the fundamental value and generates major and persistent mispricing as well as trend extrapolation. We infer that it can be risky to incentivize only forecasting accuracy and not give forecasters the right “skin in the game”. Our findings are informative for tracing the sources of mispricing as well as for enhancing financial stability.