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Cognitive bubbles

Author

Listed:
  • Ciril Bosch-Rosa

    () (Berlin University of Technology
    Colegio Universitario de Estudios Financieros)

  • Thomas Meissner

    (Maastricht University)

  • Antoni Bosch-Domènech

    (Universitat Pompeu Fabra and Barcelona GSE)

Abstract

Abstract Smith et al. (Econometrica 56(5):1119, 1988) reported large bubbles and crashes in experimental asset markets, a result that has been replicated many times. Here we test whether the occurrence of bubbles depends on the experimental subjects’ cognitive sophistication. In a two-part experiment, we first run a battery of tests to assess the subjects’ cognitive sophistication and classify them into low or high levels. We then invite them separately to two asset market experiments populated only by subjects with either low or high cognitive sophistication. We observe classic bubble and crash patterns in markets populated by subjects with low levels of cognitive sophistication. Yet, no bubbles or crashes are observed with our sophisticated subjects, indicating that cognitive sophistication of the experimental market participants has a strong impact on price efficiency.

Suggested Citation

  • Ciril Bosch-Rosa & Thomas Meissner & Antoni Bosch-Domènech, 2018. "Cognitive bubbles," Experimental Economics, Springer;Economic Science Association, vol. 21(1), pages 132-153, March.
  • Handle: RePEc:kap:expeco:v:21:y:2018:i:1:d:10.1007_s10683-017-9529-0
    DOI: 10.1007/s10683-017-9529-0
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset market experiment; Bubbles; Cognitive sophistication;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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