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The Effect of Earned vs. House Money on Price Bubble Formation in Experimental Asset Markets

  • Brice Corgnet

    ()

    (Argyros School of Business and Economics, Chapman University)

  • Roberto Hernán González

    ()

    (Universidad de Granada)

  • Praveen Kujal

    ()

    (Universidad Carlos III)

  • David Porter

    ()

    (Economic Science Institute, Chapman University)

Can “house money” explain asset market bubbles? We test this hypothesis in an asset market experiment with a certain dividend. We compare experiments where the initial portfolio of cash and shares is given to subjects, i.e. house money, to a treatment in which individual initial portfolios are constructed using subject earned money from a real effort task. We find that bubbles still occur; however trading volumes are significantly abated and the dispersion of earnings is significantly lower when subjects earn their starting endowments. We further investigate the role of cognitive ability in accounting for the differences in earnings distribution across treatments by using the Cognitive Reflection Test (CRT). We find that high CRT subjects earned more money on average than the initial value of their portfolio while low CRT subjects earned less. Subjects with low CRT scores were net purchasers (sellers) of shares when the price was above (below) fundamental value while the opposite was true for subjects with high CRT scores.

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File URL: http://www.chapman.edu/research-and-institutions/economic-science-institute/_files/WorkingPapers/corgnet-porter-effect-of-earned-vs-house-money.pdf
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Paper provided by Chapman University, Economic Science Institute in its series Working Papers with number 13-04.

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Length: 45 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:chu:wpaper:13-04
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