IDEAS home Printed from
MyIDEAS: Log in (now much improved!) to save this paper

Do Option-like Incentives Induce Overvaluation? Evidence from Experimental Asset Markets

  • Holmén, Martin


    (Department of Economics, School of Business, Economics and Law, Göteborg University)

  • Kirchler, Michael


    (University of Innsbruck and University of Gothenburg)

  • Kleinlercher, Daniel


    (University of Innsbruck)

One potential reason for bubbles evolving prior to the financial crisis was excessive risk taking stemming from option-like incentive schemes in financial institutions. By running laboratory asset markets, we investigate the impact of option-like incentives on price formation and trading behavior. We observe (i) that option-like incentives induce significantly higher market prices than linear incentives. We further find that (ii) option-like incentives provoke subjects to behave differently and to take more risk than subjects with linear incentives. We finally show that (iii) trading at inflated prices is rational for subjects with option-like incentives since it increases their expected payout.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by University of Gothenburg, Department of Economics in its series Working Papers in Economics with number 540.

in new window

Length: 38 pages
Date of creation: 18 Sep 2012
Date of revision: 21 Nov 2012
Handle: RePEc:hhs:gunwpe:0540
Contact details of provider: Postal:
Department of Economics, School of Business, Economics and Law, University of Gothenburg, Box 640, SE 405 30 GÖTEBORG, Sweden

Phone: 031-773 10 00
Web page:

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Neglected risks, financial innovation and financial fragility," Economics Working Papers 1251, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2010.
  2. Chevalier, J. & Ellison, G., 1996. "Risk Taking by Mutual Funds as a Response to Incentives," Working papers 96-3, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2010. "Financial Innovation and Financial Fragility," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
  4. William Goetzmann & Jonathan Ingersoll & Stephen Ross, 1998. "High-Water Marks and Hedge Fund Management Contracts," Yale School of Management Working Papers ysm81, Yale School of Management, revised 01 Aug 2001.
  5. 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 831-59, July.
  6. Michael Kirchler & Juergen Huber & Thomas Stoeckl, 2011. "Thar she bursts - Reducing confusion reduces bubbles," Working Papers 2011-08, Faculty of Economics and Statistics, University of Innsbruck.
  7. Cuoco, Domenico & Kaniel, Ron, 2011. "Equilibrium prices in the presence of delegated portfolio management," Journal of Financial Economics, Elsevier, vol. 101(2), pages 264-296, August.
  8. Plott, Charles R. & Sunder, Shyam., . "Rational Expectations and the Aggregation of Diverse Information in Laboratory Security Markets," Working Papers 463, California Institute of Technology, Division of the Humanities and Social Sciences.
  9. Mark Grinblatt & Sheridan Titman, 1989. "Adverse Risk Incentives and the Design of Performance-Based Contracts," Management Science, INFORMS, vol. 35(7), pages 807-822, July.
  10. Allen, Franklin & Gale, Douglas, 2000. "Bubbles and Crises," Economic Journal, Royal Economic Society, vol. 110(460), pages 236-55, January.
  11. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-68, September.
  12. Franklin Allen, 2001. "Do Financial Institutions Matter?," Center for Financial Institutions Working Papers 01-04, Wharton School Center for Financial Institutions, University of Pennsylvania.
  13. Bao, T. & Hommes, C.H. & Sonnemans, J. & Tuinstra, J., 2010. "Individual Expectations, Limited Rationality and Aggregate Outcomes," CeNDEF Working Papers 10-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  14. Franklin Allen & Gary Gorton, 1993. "Churning Bubbles," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 813-836.
  15. R. Mark Isaac & Duncan James, 2003. "Boundaries of the Tournament Pricing Effect in Asset Markets: Evidence from Experimental Markets," Southern Economic Journal, Southern Economic Association, vol. 69(4), pages 936-951, April.
  16. John List & Omar Al-Ubaydli, 2012. "On the Generalizability of Experimental Results in Economics," Artefactual Field Experiments 00467, The Field Experiments Website.
  17. Lucy F. Ackert & Narat Charupat & Bryan K. Church & Richard Deaves, 2006. "Margin, Short Selling, And Lotteries In Experimental Asset Markets," Southern Economic Journal, Southern Economic Association, vol. 73(2), pages 419–436, October.
  18. Kirchler, Michael & Huber, Jürgen & Kleinlercher, Daniel, 2011. "Market microstructure matters when imposing a Tobin tax—Evidence from the lab," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 586-602.
  19. 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 1119-51, September.
  20. Cars Hommes & Joep Sonnemans & Jan Tuinstra & Henk van de Velden, 2003. "Coordination of Expectations in Asset Pricing Experiments," Tinbergen Institute Discussion Papers 03-010/1, Tinbergen Institute.
  21. Steven D. Levitt & John A. List, 2007. "What Do Laboratory Experiments Measuring Social Preferences Reveal About the Real World?," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 153-174, Spring.
  22. Brown, Keith C & Harlow, W V & Starks, Laura T, 1996. " Of Tournaments and Temptations: An Analysis of Managerial Incentives in the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 51(1), pages 85-110, March.
  23. Franklin Allen, 2001. "Presidential Address: Do Financial Institutions Matter?," Journal of Finance, American Finance Association, vol. 56(4), pages 1165-1175, 08.
  24. 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, 06.
  25. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer;Economic Science Association, vol. 10(2), pages 171-178, June.
  26. Vivian Lei & Filip Vesely, 2009. "Market Efficiency: Evidence From A No-Bubble Asset Market Experiment," Pacific Economic Review, Wiley Blackwell, vol. 14(2), pages 246-258, 05.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:hhs:gunwpe:0540. 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: (Marie Andersson)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.