Losses on Asset Returns Caused by Perception Gaps of Fundamental Values: Evidence from laboratory experiments

A large number of studies have tackled the question of asset bubbles, in which whether or not market participants are able to calculate fundamental values is considered to play a key role in reducing bubbles. Contrary to the existing literature on uncertainty, this study conducts a series of laboratory experiments, wherein subjects cannot calculate objective expected returns with certainty. In such cases, gaps between objective and subjective expected returns (perception gaps) arise. The purpose of this study is to clarify (i) how asset prices fluctuate and (ii) if perception gaps lead to inefficient transactions. Moreover, (iii) we estimate the losses caused by perception gaps. Our estimation results indicate that perception gaps linger across rounds, and, accordingly, these gaps may generate earnings losses. Moreover, we find that the greater a perception gap of a subject, the greater is the inefficiency from his/her transactions. Traders now are using artificial intelligence (AI) for decision making. We also discuss policy implications on the introduction of AI into asset markets.