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Bubbles and Experience: An Experiment on Speculation

  • Dufwenberg, Martin


    (Economics of Department)

  • Lindqvist, Tobias

    (The Research Institute of Industrial Economics)

  • Moore, Evan


    (Auburn University Montgomery)

We investigate experimentally how the share of experienced traders in double-auction asset markets affects trading, in particular the occurrence of bubble-crash pricing patterns. In each session, six subjects trade in three successive market rounds and gain experience. In a fourth round, depending on the treatment, two or four experienced subjects are replaced by inexperienced subjects. The results are compared to earlier findings when all traders were either inexperienced or experienced. We explore what can be learned by analogy between these laboratory findings and the performance of naturally occurring markets.

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Paper provided by Research Institute of Industrial Economics in its series Working Paper Series with number 588.

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Length: 25 pages
Date of creation: 20 Jan 2003
Date of revision:
Handle: RePEc:hhs:iuiwop:0588
Contact details of provider: Postal: Research Institute of Industrial Economics, Box 55665, SE-102 15 Stockholm, Sweden
Phone: +46 8 665 4500
Fax: +46 8 665 4599
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  1. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "The Size and Incidence of Losses from Noise Trading," J. Bradford De Long's Working Papers _128, University of California at Berkeley, Economics Department.
  2. 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 509-41, October.
  3. De Long, J Bradford, et al, 1989. " The Size and Incidence of the Losses from Noise Trading," Journal of Finance, American Finance Association, vol. 44(3), pages 681-96, July.
  4. Garber, Peter M, 1989. "Tulipmania," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 535-60, June.
  5. Dilip Abreu & Markus K. Brunnermeier, 2003. "Bubbles and Crashes," Econometrica, Econometric Society, vol. 71(1), pages 173-204, January.
  6. Vernon L. Smith, 1962. "An Experimental Study of Competitive Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 70, pages 111.
  7. Palomino, Frederic, 1996. " Noise Trading in Small Markets," Journal of Finance, American Finance Association, vol. 51(4), pages 1537-50, September.
  8. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  9. Robert Slonim, 2005. "Competing Against Experienced and Inexperienced Players," Experimental Economics, Springer, vol. 8(1), pages 55-75, April.
  10. 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.
  11. 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.
  12. Peterson, Steven P., 1993. "Forecasting dynamics and convergence to market fundamentals : Evidence from experimental asset markets," Journal of Economic Behavior & Organization, Elsevier, vol. 22(3), pages 269-284, December.
  13. Vernon L. Smith, 1964. "Effect of Market Organization on Competitive Equilibrium," The Quarterly Journal of Economics, Oxford University Press, vol. 78(2), pages 181-201.
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