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The effect of earned vs. house money on price bubble formation in experimental asset markets

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Listed author(s):
  • Porter, David
  • Kujal, Praveen
  • Hernán, Roberto
  • Corgnet, Brice

Abstract

Can “house money” explain asset market bubbles? We test this hypothesis in an asset experiment with a certain dividend cash and shares is given to subjects initial portfolios are constructed using subject 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 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://e-archivo.uc3m.es/bitstream/handle/10016/16384/we1304.pdf?sequence=1
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Paper provided by Universidad Carlos III de Madrid. Departamento de Economía in its series UC3M Working papers. Economics with number we1304.

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Date of creation: Feb 2013
Handle: RePEc:cte:werepe:we1304
Contact details of provider: Web page: http://www.eco.uc3m.es/

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