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Super-exponential bubbles in lab experiments: evidence for anchoring over-optimistic expectations on price

  • Andreas H\"usler
  • Didier Sornette
  • Cars H. Hommes

We analyze a controlled price formation experiment in the laboratory that shows evidence for bubbles. We calibrate two models that demonstrate with high statistical significance that these laboratory bubbles have a tendency to grow faster than exponential due to positive feedback. We show that the positive feedback operates by traders continuously upgrading their over-optimistic expectations of future returns based on past prices rather than on realized returns.

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File URL: http://arxiv.org/pdf/1205.0635
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Paper provided by arXiv.org in its series Papers with number 1205.0635.

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Date of creation: May 2012
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Handle: RePEc:arx:papers:1205.0635
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  7. Johansen, Anders & Sornette, Didier, 2001. "Finite-time singularity in the dynamics of the world population, economic and financial indices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 294(3), pages 465-502.
  8. Mikhail Anufriev & Cars Hommes, 2012. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes in Asset Pricing Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(4), pages 35-64, November.
  9. Smith, Vernon L & Suchanek, Gerry L & Williams, Arlington W, 1988. "Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets," Econometrica, Econometric Society, vol. 56(5), pages 1119-51, September.
  10. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  11. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  12. Gallegati, Mauro & Palestrini, Antonio & Rosser, J. Barkley, 2011. "The Period Of Financial Distress In Speculative Markets: Interacting Heterogeneous Agents And Financial Constraints," Macroeconomic Dynamics, Cambridge University Press, vol. 15(01), pages 60-79, February.
  13. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2004. "Coordination of Expectations in Asset Pricing Experiments," DNB Staff Reports (discontinued) 119, Netherlands Central Bank.
  14. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
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  16. Refet S. Gürkaynak, 2008. "Econometric Tests Of Asset Price Bubbles: Taking Stock ," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 166-186, 02.
  17. Anders Johansen & Didier Sornette, 2000. "The Nasdaq crash of April 2000: Yet another example of log-periodicity in a speculative bubble ending in a crash," Papers cond-mat/0004263, arXiv.org, revised May 2000.
  18. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1989. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," NBER Working Papers 2880, National Bureau of Economic Research, Inc.
  19. Heemeijer, P. & Hommes, C.H. & Sonnemans, J. & Tuinstra, J., 2006. "Price Stability and Volatility in Markets with Positive and Negative Expectations Feedback: An Experimental Investigation," CeNDEF Working Papers 06-05, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  20. Anufriev, M. & Hommes, C.H., 2009. "Evolutionary Selection of Individual Expectations and Aggregate Outcomes," CeNDEF Working Papers 09-09, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  21. Kaizoji, Taisei (kaizoji@icu.ac.jp), 2010. "A Behavioral Model of Bubbles and Crashes," MPRA Paper 20352, University Library of Munich, Germany.
  22. Evans, George W, 1991. "Pitfalls in Testing for Explosive Bubbles in Asset Prices," American Economic Review, American Economic Association, vol. 81(4), pages 922-30, September.
  23. Sornette, Didier & Woodard, Ryan & Zhou, Wei-Xing, 2009. "The 2006–2008 oil bubble: Evidence of speculation, and prediction," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(8), pages 1571-1576.
  24. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. " Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-64, December.
  25. Zhou, Wei-Xing & Sornette, Didier, 2006. "Is there a real-estate bubble in the US?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 361(1), pages 297-308.
  26. Jiang, Zhi-Qiang & Zhou, Wei-Xing & Sornette, Didier & Woodard, Ryan & Bastiaensen, Ken & Cauwels, Peter, 2010. "Bubble diagnosis and prediction of the 2005-2007 and 2008-2009 Chinese stock market bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 149-162, June.
  27. Lei, V. & Noussair, C. & Plott, C.R., 1998. "Non-Speculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality," Purdue University Economics Working Papers 1120, Purdue University, Department of Economics.
  28. Ernan Haruvy & Charles N. Noussair, 2006. "The Effect of Short Selling on Bubbles and Crashes in Experimental Spot Asset Markets," Journal of Finance, American Finance Association, vol. 61(3), pages 1119-1157, 06.
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