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Bubbles and Experience: An Experiment with a Steady Inflow of New Traders

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Abstract

We revisit the effect of traders' experience on price bubbles by introducing either one-third or two-thirds steady inflow of new traders in the repeated experimental asset markets. We find that bubbles are not significantly abated by the third repetition of the market with the inflow of new traders. The relative importance of experience to the formation of bubbles depends on the proportion of new traders in the market. Our findings identify a market environment where increased experience is not sufficient to eliminate price bubbles.

Suggested Citation

  • Huan Xie & Jipeng Zhang, 2012. "Bubbles and Experience: An Experiment with a Steady Inflow of New Traders," Working Papers 12001, Concordia University, Department of Economics.
  • Handle: RePEc:crd:wpaper:12001
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    1. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
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    7. Mark van Boening & Vernon L. Smith & Charissa P. Wellford, 2000. "Dividend timing and behavior in laboratory asset markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 16(3), pages 567-583.
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    1. repec:eee:jeborg:v:140:y:2017:i:c:p:18-34 is not listed on IDEAS
    2. Akiyama, Eizo & Hanaki, Nobuyuki & Ishikawa, Ryuichiro, 2014. "How do experienced traders respond to inflows of inexperienced traders? An experimental analysis," Journal of Economic Dynamics and Control, Elsevier, vol. 45(C), pages 1-18.
    3. da Gama Batista, João & Massaro, Domenico & Bouchaud, Jean-Philippe & Challet, Damien & Hommes, Cars, 2017. "Do investors trade too much? A laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 18-34.
    4. Kirchler, Michael & Bonn, Caroline & Huber, Jürgen & Razen, Michael, 2015. "The “inflow-effect”—Trader inflow and price efficiency," European Economic Review, Elsevier, vol. 77(C), pages 1-19.

    More about this item

    Keywords

    Bubbles; Asset Markets; Experience; Inflow of Traders;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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