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

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  • 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
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    Cited by:

    1. 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.
    2. 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.
    3. Brice Corgnet & Antonio M. Espín & Roberto Hernán-González, 2015. "The cognitive basis of social behavior: cognitive reflection overrides antisocial but not always prosocial motives," Working Papers 15-04, Chapman University, Economic Science Institute.
    4. 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.
    5. 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), University of Nice Sophia Antipolis.
    6. 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.
    7. 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.
    8. 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.
    9. Ciril Bosch-Rosa & Thomas Meissner & Antoni Bosch-Domènech, 2018. "Cognitive bubbles," Experimental Economics, Springer;Economic Science Association, vol. 21(1), pages 132-153, March.
    10. 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.
    11. 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.
    12. 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.
    13. 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.
    14. 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.
    15. 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.
    16. 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), University of Nice Sophia Antipolis.
    17. 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), University of Nice Sophia Antipolis.
    18. Daniel Houser & Erte Xiao, 2015. "House money effects on trust and reciprocity," Public Choice, Springer, vol. 163(1), pages 187-199, April.

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