IDEAS home Printed from https://ideas.repec.org/p/cte/werepe/we1304.html
   My bibliography  Save this paper

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

Author

Listed:
  • 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.

Suggested Citation

  • Porter, David & Kujal, Praveen & Hernán, Roberto & Corgnet, Brice, 2013. "The effect of earned vs. house money on price bubble formation in experimental asset markets," UC3M Working papers. Economics we1304, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:we1304
    as

    Download full text from publisher

    File URL: https://e-archivo.uc3m.es/bitstream/handle/10016/16384/we1304.pdf?sequence=1
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Lei, Vivian & Noussair, Charles N & Plott, Charles R, 2001. "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality," Econometrica, Econometric Society, vol. 69(4), pages 831-859, July.
    2. Martin Dufwenberg & Tobias Lindqvist & Evan Moore, 2005. "Bubbles and Experience: An Experiment," American Economic Review, American Economic Association, vol. 95(5), pages 1731-1737, December.
    3. Stephan Kroll & Todd L. Cherry & Jason F. Shogren, 2007. "Voting, Punishment, And Public Goods," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 557-570, July.
    4. W. Guth & R. Schmittberger & B. Schwartz, 2010. "An experimental analysis of ultimatum bargaining," Levine's Working Paper Archive 291, David K. Levine.
    5. Oechssler, Jörg & Roider, Andreas & Schmitz, Patrick W., 2009. "Cognitive abilities and behavioral biases," Journal of Economic Behavior & Organization, Elsevier, vol. 72(1), pages 147-152, October.
    6. Todd L. Cherry & Peter Frykblom & Jason F. Shogren, 2002. "Hardnose the Dictator," American Economic Review, American Economic Association, vol. 92(4), pages 1218-1221, September.
    7. Ruffle, Bradley J., 1998. "More Is Better, But Fair Is Fair: Tipping in Dictator and Ultimatum Games," Games and Economic Behavior, Elsevier, vol. 23(2), pages 247-265, May.
    8. Oxoby, Robert J. & Spraggon, John, 2008. "Mine and yours: Property rights in dictator games," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 703-713, March.
    9. Cherry, Todd L. & Kroll, Stephan & Shogren, Jason F., 2005. "The impact of endowment heterogeneity and origin on public good contributions: evidence from the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 57(3), pages 357-365, July.
    10. David Reinstein & Gerhard Riener, 2012. "Decomposing desert and tangibility effects in a charitable giving experiment," Experimental Economics, Springer;Economic Science Association, vol. 15(1), pages 229-240, March.
    11. Jeremy Clark, 2002. "House Money Effects in Public Good Experiments," Experimental Economics, Springer;Economic Science Association, vol. 5(3), pages 223-231, December.
    12. Richard H. Thaler & Eric J. Johnson, 1990. "Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice," Management Science, INFORMS, vol. 36(6), pages 643-660, June.
    13. Corgnet, Brice & Kujal, Praveen & Porter, David, 2010. "The effect of reliability, content and timing of public announcements on asset trading behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 254-266, November.
    14. 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, June.
    15. James Konow, 2000. "Fair Shares: Accountability and Cognitive Dissonance in Allocation Decisions," American Economic Review, American Economic Association, vol. 90(4), pages 1072-1091, September.
    16. 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 1119-1151, September.
    17. Rutstrom, E. Elisabet & Williams, Melonie B., 2000. "Entitlements and fairness:: an experimental study of distributive preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 43(1), pages 75-89, September.
    18. Luis Roberto Martínez & Christian Jaramillo & Nicolas De Roux & Juan-Camilo Cárdenas, 2010. "It´s Not My Money: An Experiment on Risk Aversion and the House-money Effect," Documentos CEDE 006712, Universidad de los Andes - CEDE.
    19. Shane Frederick, 2005. "Cognitive Reflection and Decision Making," Journal of Economic Perspectives, American Economic Association, vol. 19(4), pages 25-42, Fall.
    20. Glenn Harrison, 2007. "House money effects in public good experiments: Comment," Experimental Economics, Springer;Economic Science Association, vol. 10(4), pages 429-437, December.
    21. Charles Noussair & Steven Tucker, 2006. "Futures Markets And Bubble Formation In Experimental Asset Markets," Pacific Economic Review, Wiley Blackwell, vol. 11(2), pages 167-184, June.
    22. Porter, David P & Smith, Vernon L, 1995. "Futures Contracting and Dividend Uncertainty in Experimental Asset Markets," The Journal of Business, University of Chicago Press, vol. 68(4), pages 509-541, October.
    23. Michael Kirchler & Jurgen Huber & Thomas Stockl, 2012. "Thar She Bursts: Reducing Confusion Reduces Bubbles," American Economic Review, American Economic Association, vol. 102(2), pages 865-883, April.
    24. Guth, Werner & Schmittberger, Rolf & Schwarze, Bernd, 1982. "An experimental analysis of ultimatum bargaining," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 367-388, December.
    25. David Porter & Vernon Smith, 1994. "Stock market bubbles in the laboratory," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(2), pages 111-128.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tomoe Hoshihata & Ryuichiro Ishikawa & Nobuyuki Hanaki & Eizo Akiyama, 2017. "Flat Bubbles in Long-Horizon Experiments: Results from two Market Conditions," GREDEG Working Papers 2017-32, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    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. Brice Corgnet & Mark DeSantis & David Porter, 2015. "What Makes a Good Trader? On the Role of Quant Skills, Behavioral Biases and Intuition on Trader Performance," Working Papers 15-17, Chapman University, Economic Science Institute.
    4. Brice Corgnet & Antonio M. Espin & Roberto Hernán-González, 2015. "The cognitive basis of social behavior : cognitive reflection overrides antisocial but not always prosocial motives," Post-Print hal-02311954, HAL.
    5. Nobuyuki Hanaki & Eizo Akiyama & Ryuichiro Ishikawa, 2017. "Effects of eliciting long-run price forecasts on market dynamics in asset market experiments," Working Papers halshs-01263661, HAL.
    6. Andreas Hefti & Steve Heinke & Frédéric Schneider, 2016. "Mental capabilities, trading styles, and asset market bubbles: theory and experiment," ECON - Working Papers 234, Department of Economics - University of Zurich.
    7. Nobuyuki Hanaki & Eizo Akiyama & Yukihiko Funaki & Ryuichiro Ishikawa, 2017. "Diversity in Cognitive Ability Enlarges Mispricing in Experimental Asset Markets," GREDEG Working Papers 2017-08, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    8. Cueva, Carlos & Rustichini, Aldo, 2015. "Is financial instability male-driven? Gender and cognitive skills in experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 119(C), pages 330-344.
    9. Kiss, H.J. & Rodriguez-Lara, I. & Rosa-García, A., 2016. "Think twice before running! Bank runs and cognitive abilities," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 64(C), pages 12-19.
    10. Eizo Akiyama & Nobuyuki Hanaki & Ryuichiro Ishikawa, 2017. "It is Not Just Confusion! Strategic Uncertainty in An Experimental Asset Market," Economic Journal, Royal Economic Society, vol. 127(605), pages 563-580, October.
    11. Ciril Bosch-Rosa & Thomas Meissner & Antoni Bosch-Domènech, 2018. "Cognitive bubbles," Experimental Economics, Springer;Economic Science Association, vol. 21(1), pages 132-153, March.
    12. Giusti, G. & Noussair, C.N. & Voth, H-J., 2013. "Recreating the South Sea Bubble : Lessons from an Experiment in Financial History," Discussion Paper 2013-042, Tilburg University, Center for Economic Research.
    13. Kiss, Hubert János & Rodriguez-Lara, Ismael & Rosa-García, Alfonso, 2015. "Kognitív képességek és stratégiai bizonytalanság egy bankrohamkísérletben
      [Cognitive abilities and strategic uncertainty in a bank-run experiment]      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1030-1047.
    14. Breaban, A.G. & Noussair, C.N., 2014. "Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment," Discussion Paper 2014-010, Tilburg University, Center for Economic Research.
    15. John Griffin, 2015. "Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset," Fordham Economics Discussion Paper Series dp2015-01, Fordham University, Department of Economics.
    16. John Griffin, 2015. "Risk Premia and Knightian Uncertainty in an Experimental Market Featuring a Long-Lived Asset," Fordham Economics Discussion Paper Series dp2015-01er:dp2015-01, Fordham University, Department of Economics.
    17. Breaban, A.G. & Noussair, C.N., 2014. "Fundamental Value Trajectories and Trader Characteristics in an Asset Market Experiment," Other publications TiSEM 3103cf69-bc46-42bf-a9a5-e, Tilburg University, School of Economics and Management.
    18. Breaban, A.G., 2014. "Behavior and asset markets : Individual decisions, emotions and fundamental value trajectories," Other publications TiSEM a20e6a40-f15e-4331-83cb-c, Tilburg University, School of Economics and Management.
    19. Nobuyuki Hanaki & Eizo Akiyama & Ryuichiro Ishikawa, 2016. "A Methodological Note on Eliciting Price Forecasts in Asset Market Experiments," GREDEG Working Papers 2016-02, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    20. Nobuyuki Hanaki & Eizo Akiyama & Yukihiko Funaki & Ryuichiro Ishikawa, 2015. "Diversity in Cognitive Ability Enlarges Mispricing," GREDEG Working Papers 2015-29, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    21. Giusti, G. & Noussair, C.N. & Voth, H-J., 2013. "Recreating the South Sea Bubble : Lessons from an Experiment in Financial History," Other publications TiSEM dd894e7e-521a-4092-94b0-0, Tilburg University, School of Economics and Management.
    22. Sheen S. Levine & Mark Bernard & Rosemarie Nagel, 2018. "Strategic intelligence: The cognitive capability to anticipate competitor behaviour," Strategic Management Journal, Wiley Blackwell, vol. 39(2), pages 527-527, February.
    23. Daniel Houser & Erte Xiao, 2015. "House money effects on trust and reciprocity," Public Choice, Springer, vol. 163(1), pages 187-199, April.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cte:werepe:we1304. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ana Poveda). General contact details of provider: http://www.eco.uc3m.es/ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.